• US crude oil inventories increased by 6.8 MMBbl, according to the weekly EIA report, the first increase in inventories in 11 weeks. Gasoline and distillates inventories declined 2.0 MMBbl and 1.9 MMBbl, respectively. Total petroleum inventories posted an increase of 2.1 MMBbl. US production was estimated to be up 41 MBbl/d, with the lower 48 representing 40 MBbl/d of the gains. Imports increased by 380 MBbl/d to an average of 8.4 MMBbl/d versus the week prior.
• Prices found selling early in the week, and the inventory numbers supported the declines for a brief period. That trend changed late in the week as prices found a bid, closing the week down just $0.35/Bbl. Prices are going to enter a period of consolidation after riding the speculative wave. Much of this buying has been stimulated by the extension of the OPEC cuts, high compliance (to date) with quotas, and geopolitical unrest. All these factors have been discussed in these reports for over a month. Now the market is starting to recognize that US production is surpassing 10 MMBbl/d and that at these prices, US producers will keep hedging and drilling. This puts other crude-oil-producing nations like Saudi Arabia and Russia at risk of losing further market share. When fundamentals are rediscovered by the market, prices will correct to reflect supply and demand realities.
• The speculative element of the trade died down last week, with the latest CFTC report showing managed money long positions only increased 4,658 contracts. The merchant sector increased the short position in both the producer and swap dealer sectors (hedging). Eventually, prices should test major support around the $60-$61/Bbl level. The supply and demand fundamentals suggest a lower equilibrium. Drillinginfo expects prices to return to a less speculatively induced price level, settling in a range around $55/Bbl for an extended period of time.
• Natural gas dry production remained above 77 Bcf/d last week (with one day nearly 78 Bcf/d), increasing 220 MMcf/d week-on-week. Canadian imports rose only 60 MMcf/d.
• On the demand side, colder temperatures pushed up demand in all sectors. Res/Com demand increased by 4.8 Bcf/d, industrial demand increased 0.5 Bcf/d, and power demand rose slightly by 0.2 Bcf/d on average for the week. LNG exports increased by 0.77 Bcf/d, and Mexican exports were up slightly at 0.1 Bcf/d, leaving total demand higher by 6.85 Bcf/d while total supply was up 0.35 Bcf/d.
• The storage report last week came in a little below expectations with a withdrawal of 99 Bcf. The initial move on this bearish report was a price that declined below $2.90 per MMBtu and created the high end of the range for the remainder of the week. This week’s release should be well below the five-year average and below last year’s withdrawal. With the forecasts leaning cooler this coming week, expect the report in two weeks to reflect withdrawals near the five-year average and below last year’s.
• Price action last week showed the effects of the continued short covering rally that started two weeks earlier. The speculative sector, as reported in the latest CFTC release (dated Tuesday, Jan. 30), showed a decline of 54,251 contracts as prices spiked higher during the early phase of the expiration process. However, the short covering continued on the expiration day as prices rallied to expire at the highest level since the Jan. 17 contract that expired at $3.93. This run makes 14 of the past 15 months that prices rallied into expiration. Discussed here several times, rallies based primarily on short covering are not long-lived. That was evident in the past two weeks, as the big run in February did not spill over to the March contract. In fact, the expiration of February contracts left a gap in daily prices at $3.297, which March tried to close with an ill-fated rally that could only rise to $3.259 before collapsing on Wednesday. We discussed last week that the March contract could not garner the strength associated with the February run in prices and closed a day above the March 200-moving average, while March did manage a slight close above the commonly watched average. The pressure associated with failing to close the price gap from the February expiration proved too powerful and started the correction.
• Trade is expected to continue to follow the weather forecasts for February and early March as participants focus on the ending inventories at the end of the season to place their positions. Two of the next three withdrawals seem to be well below the five-year average, with the third being very near the average. Forecasts will continue to affect price movements, but look for the trade to integrate the forecasts in terms of storage impacts rather than the forecast expectations of being above or below normal.
• Inventories decreased 0.9 MMBbl in last week’s EIA report. Propane stocks now sit at 53.0 MMBbl, roughly 9.6 MMBbl lower than this time last year. However, propane stocks are still above the five-year average of 49.1 MMBbl for this time of year prior to 2015 (before the crude price crash).
• Ethane prices saw the most drastic change out of all NGLs, dropping 13% week-over-week. The drop was due to the shift in gas prices, which collapsed on Wednesday. With gas prices closer to DI’s expected long-term price, we should expect ethane to hover around 25 cents/gallon in the coming months.
• Wednesday, Enterprise and Navigator announced that they have entered into a 50/50 joint venture to build an ethylene export facility. The facility will handle 1 million tons per year with 30 thousand tons of refrigerated storage and will be built along the Gulf Coast. It is supported by long-term contracts and is expected to be in service by Q1 2020.
• Prior to last week, Shell hadn’t had too much trouble building the Falcon ethane pipeline project, which is anticipated to feed the new cracker in Beaver County, PA. However, last week, the Ambridge Water Authority (an organization that supervises a reservoir that provides drinking water for the local community) expressed strong opposition to the Falcon pipeline route. This news could mean potential delays for the start-up of the Falcon pipeline, which may have corresponding consequences for the start-up of the Shell cracker.