- US crude oil inventories increased 3.0 MMBbl, according to the weekly EIA report. Gasoline inventories increased 2.5 MMBbl, and distillates declined 1.0 MMBbl. Total petroleum inventories posted a build of 3.7 MMBbl. US production was estimated to be up 13 MBbl/d. Imports increased 261 MBbl/d to an average of 7.3 MMBbl/d versus the week prior.
- Prices started the week strong. Traders returned from the weekend with news from Saudi Arabia stating that production in Q1 would be much lower than the quota, with exports set to average 7 MMBbl/d. Additionally, Libyan protests at the El Feel field caused a supply outage of 90 MBbl/d, affecting exports from Mellitah. Saudi Arabia’s bullish press releases continue to come after prices display weakness, as it is in their best interest to support prices before the Aramco IPO. However, as the US dollar rebounded during the week, WTI came under some selling pressure. The downward pressure continued even as the US dollar faltered later in the week.
- How much longer the speculative community will continue to bolster prices on Saudi news will be interesting to observe. The inventory data clearly brought back a bearish fundamental perspective. While it is in the Saudis’ best interest to keep crude oil prices strong, it is also in the best interests of US producers to take advantage of these prices through hedging and additional gains in market share. The latest CFTC report showed the commercial short sector (producer hedging) increased 20,787 contracts, taking advantage of the higher prices. Unlike the reaction to prior bullish news from Saudi Arabia, the speculative long positions only increased 20,613 contracts through February 27, and many of those positions were likely liquidated after the release of inventory data.
- The market internals continue to exemplify an exhaustion of the rally. During previous gains, the market attained the gains with higher volume and open interest. However, those internals are not reflected in the current price action. Last week’s high price was on the lightest-volume day of the week. Only later in the week did volume come back into the market when prices showed weakness.
- Prices continue to construct a range ($58/Bbl-$64/Bbl) in the near term. As the market starts to comprehend the longer-term supply/demand imbalance potential, look for tests of the lower end of the range in the coming weeks, with news releases bringing only short-lived support. Drillinginfo believes that fundamental realities will bring prices back to a less speculative price level, settling in a range around $55/Bbl in the longer term.
- Natural gas dry production increased 0.4 Bcf/d, rising well above the average of 78 Bcf/d and setting a high weekly average. Canadian imports were basically flat, increasing slightly at 0.09 Bcf/d.
- On the demand side, temperatures became more seasonal this week, causing all sectors to decline on average for the week: Res/Com (2.86 Bcf/d), industrial demand (0.38 Bcf/d), and power demand (0.38 Bcf/d). Mexico exports were up slightly, rising 0.11 Bcf/d. LNG exports also increased significantly this week (setting new record levels) by 1.01 Bcf/d, due to the Cove Point facility loading.
- The additional LNG exports left total demand still lower week-on-week by 3.16 Bcf/d, while total supply was up 0.63 Bcf/d.
- The storage report last week came in slightly above expectations with a withdrawal of 78 Bcf. The initial move was up, as the report was a little late to release; then prices declined, only to settle in the middle of the day’s range. This week’s release should be well below the five-year average but higher than last year’s withdrawal, which starts to create an issue for the bulls as they attempt to create a longer-term rally with support from the failed test at $2.53 from last month.
- The expiration of the March contract on Monday provided little insight as to the positioning of the traders. The latest CFTC report (dated Feb. 27) showed the managed money short positions decreasing positions by 14,505, while the managed money long sector also decreased positions by 14,139 contracts. This equal balance of trade position changes confirms the market’s indecision about in which direction the market will be trending in the near term.
- Trade is clearly seeking the next directional move. By bouncing off long-term support from December ’17, February ’17, November ’16, and August ’16 — all between $2.568 and $2.522 — a brief rally should be expected. There is no speculative strength to add to the rally, as the fundamentals may start to weigh on the market as it enters the shoulder season. Below-average temperatures have a reduced effect on prices as average temperatures rise into March and April. Should the production levels continue to rise, this will add to the burden of establishing any longer-term advances in price.
- The recent strength in prices was formed with weak internal action. Price gains of the past two weeks have occurred with declining volume and open interest, and that is not the foundation for building a longer-term run in prices. As the trade becomes more convinced that ending storage inventories will culminate around 1.4 Tcf, the growing production levels will limit any longer-term runs regardless of the support at $2.53 holding last month. With the winter coming to an end and production continuing to increase, look for trade to test that support level ($2.53) again. Should it hold firm and prices bounce off it, then the market is likely range-bound ($2.50-$3.10), similar to last year, in the near future. Should that level break down, then the market is headed for a test of the $2.20 area.
- Thursday, NGL Energy Partners and Magnum Liquids announced the formation of a joint venture to focus on storage and refined products. The JV includes combining NGL’s Sawtooth natural gas liquids storage facility and its 6.1 MMBbl of capacity with Magnum’s refined products rights and adjacent leasehold. The initial transaction is expected to close by March 31, 2018.
- Propane, normal butane, and isobutane prices lost all gains from last week, mostly led by declines in crude oil prices. NGL prices declined week-on-week by over 25% each.
- Inventories decreased 0.4 MMBbl in last week’s EIA report. Propane stocks now sit at 42.7 MMBbl, roughly 6.6 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 41.2 MMBbl for this time of year prior to 2015 (before the crude price crash).
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