- U.S. crude oil inventories increased by 3.3 MMBbl, according to the weekly EIA report. Gasoline inventories increased 0.5 MMBbl, while distillates inventories declined 1.0 MMBbl. Total petroleum inventories showed a strong gain of 6.0 MMBbl. U.S. production was estimated to be up 65 MBbl/d, with the lower 48 showing a substantial gain of 85 MBbl/d. Imports decreased by 752 MMBbl/d, to an average of 8.7 MMBbl/d versus the week prior.
- Last week, prices traded with a focus on the chemical attacks in Syria and the potential long-term ramifications around the comments from Saudi Arabia, Qatar, France, Great Britain and the United States that they would be involved in the response. This forced Russia to respond aggressively, saying U.S. military action could result in grave repercussions. However, there are other supportive elements to the market; with Venezuelan production declining, the potential of the U.S. withdrawing from the Iran nuclear deal (increasing the likelihood of sanctions lowering crude output) and the public expectation of $80 crude prices for the Saudi Aramco IPO, the market took its attention off the Syria issue and narrowed the definition from the tariff war expectations.
- Mentioned in this report in previous weeks, a significant element to the previous downturn in WTI was based upon the potential tariff war between the U.S. and China, which would have an impact on the demand that is necessary to stabilize inventories. Last week provided more clarity and direction toward the tariff issue, as China promised to open its economy further and lower import tariffs on cars. As discussed before, when this tariff issue becomes more defined and the fears recede, then the speculative trade will feel more comfortable re-entering the market, sending prices higher.
- The only issue with the speculative longs coming back into the market lies in the latest release of the CFTC report (dated April 10), which had the Managed Money long positions decreasing 4,277 contracts during the early rally last week (through Tuesday). This was occurring as prices started to challenge $66.00. The commercial sector (both long and short) reduced positions, with the longs dropping 32,320 contracts and the shorts covering 17,871 contracts.
- The run last week took prices to the highest weekly close since November 2014 and occurred on solid gains in volume. Open interest looks to be stronger, but the data will not be final until Monday. While the move last week centered on Syria, it will be interesting if the market continues to extend higher with the results of the U.S. response known by the market. The tariff issue has become better understood and will have little impact on additional price runs. The issue facing the market and future gains is the substantial growth in U.S. production, which is continuing to grow and will likely add volumes faster with these higher prices. While the Saudis would like to have $80 crude for the ARAMCO IPO later this year, this run will not lead to those levels without a correction retesting key support areas between $50.00 and $55.00. It is likely that the speculative interests will run out of headlines and will be forced to liquidate length at some point in the process.
- The uncertainties surrounding the Syrian issues were settled, to some degree, over the weekend. Perhaps, prices will start strong this week, but expect prices to retrace back to the range from last week ($62-$65). Should additional events embolden additional length, then this market may be headed to a “blow-off” type of topping pattern and $70.00 would be a reasonable area for the buying to cease. This type of speculative bubble can create havoc in a short period of time and the market never fully appreciates the piece of information that forces the initial liquidation. The consistent level of growth by the U.S. producer will envelop the WTI price in the future and eventually may lead the market out of this speculative state that has developed since last fall. The longer prices stay at these levels or higher, the more likely it is that the U.S. producer will commit resources, and that oil will remain in the market long term, which may force a serious price correction should demand not match expectations. It has been Drillinginfo’s theory that the fundamental data points to prices eventually heading back to a less conflicted environment, settling in a range around $55.00.
- Natural gas dry production increased last week, rising 0.13 Bcf/d. The average production level is starting to challenge 80 Bcf/d and will likely surpass this level next week. Canadian imports decreased by 0.32 Bcf/d week-over-week.
- Demand levels fell in most sectors, with Res/Com leading the declines and falling 1.2 Bcf/d while industrial demand fell by 0.16 Bcf/d. Power demand increased by 0.81 Bcf/d on average for the week. Mexico exports were up 0.28 Bcf/d, while LNG exports were down 0.12 Bcf/d. This left the market’s total demand lower by 1.32 Bcf/d, while total supply was lower by 0.3 Bcf/d.
- The storage report last week came in a little stronger than expected with a 19 Bcf withdrawal. This week’s withdrawal should be very similar to last week’s. The current weather forecasts indicate that next week should be the last withdrawal for the winter season. Since 2011, the average injections during the month of April have been well over 200 Bcf, with the one exception being 2013. With the expected withdrawal in this week’s report and tepid injections for the next two weeks, it is unlikely that injections during April will be anywhere near historical norms.
- The recent trade has exhibited a complacent range-bound focus for over a month, but last week started to indicate that a change may be coming. Staying in the recent range ($2.62-$2.76), prices ended up closing at the highest level since the early March rally that took prices to $2.811. This price action was accompanied by higher volume and gaining open interest, both bullish market internals. Other market information showed little change in the speculative trade creating the underlying strength as the latest CFTC report (dated April 10) showed that the Managed Money short positions increased by 9,261 contracts while the Managed Money long sector also increased positions by 10,693 contracts, for a speculative “wash” in total positions.
- For the second time in the past three weeks, prices traded below the previous week’s low only to reverse and close the week higher. The high trades last week also eclipsed the previous week’s high. These types of reversals are the gas market’s historical method of announcing an upcoming change in direction.
- As discussed last week, history shows that seasonal price strength is consistent from early spring into summer, and though prices are remaining within the recent range, a break and close above $2.746 (Jan. low) should send prices to test the March highs at $2.811. Should last week’s extension upward run out of support, then the recent range will stay in place. Eventually, the complacent range market will have to assess the low storage inventory levels versus the production gains and whether the production will be sufficient to offset the need for injections, which will be lagging significantly toward the end of April and into May.
- Mariner East I pipeline remains down and will likely remain out of service until late April. This shutdown is forcing producers to reject and sell more ethane as gas into the area’s gas pipelines. However, it does not force most producers like Range Resources to shut in or curtail production if they have other outlets.
- Mariner East II pipeline now holds a violation count of 50 with mainline construction 97% complete. After the recent vandalism on construction equipment, Sunoco issued a statement on their website offering a $10,000 reward for information that leads to an arrest. The company also chastises those trying to “protect the environment” and implies the vandalism itself is damaging to the environment.
- Inventories switched back to a draw of 417 MMBbl in last week’s EIA report. Propane stocks now sit at 35.8 MMBbl, roughly 5.8 MMBbl lower than this time last year and 9.7 MMBbl lower than the five-year average.
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