- US crude oil inventories increased 1.6 MMBbl, according to the weekly EIA report. Gasoline and distillate inventories declined 3.5 MMBbl and 2.1 MMBbl respectively. Total petroleum inventories declined 1.6 MMBbl. US production was estimated to be up 26 MBbl/d, with the lower 48 showing a gain of 25 MBbl/d. Imports increased by 1.1 MMBbl/d to an average of 8.1 MMBbl/d versus the week prior.
- Tensions between Saudi Arabia and Iran rose during the week as the Saudi air defenses shot down several ballistic missiles fired by Yemen’s Iran–aligned Houthi militia. Additionally, the Saudi Crown Prince Mohammed bin Salman said that Riyadh and Moscow were considering a partnership to stabilize oil markets. Salman stated that the goal of this partnership would be to put in place a 10-to-20-year agreement in order to closely control crude supply. The Crown Prince also stated that the much-anticipated IPO of Saudi Aramco (listing 5% of the firm) could take place at the end of 2018 or early 2019.
- Prices started the week with the run to the January high as expected in last week’s report. The run fell just short ($0.11/Bbl) of the January high, then spent the week going lower until the last trade day of the week. It has become a common trade for the market to end the week’s action with a rally that has traders comfortable with a long position over the weekend. According to the latest CFTC report, the managed money long positions increased by 13,698 contracts during the week. The commercial sector (both long and short) was largely offsetting as the longs increased by 36,780 contracts and the shorts (producer hedging) increased by 27,499 contracts. The primary driver for WTI is currently the speculative trading sector. The chart below clearly displays the direct correlation between the Managed Money longs and price action.
- Since the price rally in the spring of 2016 (which was not led by the speculative sector), every price run has had an accompanying gain in the open interest of the speculative trade. While open interest from the speculative group is nearing the highs held last January, whether there will be enough enthusiasm to extend much beyond this level is another issue. The speculative traders are keenly aware of the production growth in the US and understand that this trend is unlikely to change in the near term. US production is set to surpass 11 MMBbl/d by the end of 2018.
- While the run fell short of the January high last week, there may still be enough interest to make another run at the highs. Reaching that level will likely provide some low-risk selling opportunities, as the CFTC report last week identified some speculative selling (managed money shorts increased positions by 6,502 contracts) for the first time in recent history. Eventually, the speculatively induced trade will leave its place to fundamentals, confirming Drillinginfo’s belief that prices will head back to a range around $55/Bbl.
- Natural gas dry production increased last week, rising 0.32 Bcf/d, with most of the gains coming from the Mid-Continent and Northeast regions. The Northeast is now averaging around 27 Bcf/d while the Mid-Continent gains brought production back up to levels seen earlier in the winter. Canadian imports declined by 0.98 Bcf/d.
- Climatology continued to influence the demand levels as Res/Com fell 4.71 Bcf/d and industrial demand decreased by 0.37 Bcf/d. Power demand also decreased by 0.22 Bcf/d on average week-on-week. Mexican exports were down 0.54 Bcf/d, but LNG exports offset some of that loss by increasing by 0.38 Bcf/d. This left the market’s total demand lower by 5.92 Bcf/d while total supply was down 0.45 Bcf/d week-on-week.
- Last week’s storage report came in a little below expectations with a withdrawal of 63 Bcf. Prices were up going into the report but were tempered during the holiday-shortened trade week. The withdrawals will likely continue at a reduced level for the next two reports based on current forecasts.
- Prices rose early in the week ahead of the April contract expiration, only to succumb to daily losses later in the week. According to the latest CFTC report (dated March 27), the Managed Money short positions increased by 15,756 contracts while the Managed Money long sector reduced positions by 8,652 contracts. The recent price movement is similar to last year’s price behavior during February and March. This may provide some insight as to the future direction. Below are two charts showing the open interest positions for the summer months (April-October) strip compared to the price of the same contracts.
- Last year summer strip prices bottomed in February and formed a base from which prices rallied into the early summer. The open interest gains in summer contracts started as prices broke below $2.80 and accelerated as the prices extended down to the summer strip low of $2.515. The summer open interest position peaked in March at a little over 948,000 contracts before traders started to roll or liquidate the April portion of the summer strip. This gain in open interest was just over 441,000 contracts from the first of Jan ’17.
- This year the open interest in the summer months increased slowly as the spot price rallied at the end of January, but then accelerated significantly as summer prices retraced back to the lows. Interestingly, the lows of the 2018 trade never breached below $2.65 (versus $2.515 in 2017) for the summer strip average, and these contracts are now trading a dime below last year at the same time. This year’s summer open interest peaked in March at 971,000 contracts, gaining only 426,000 contracts since Jan 1. This year’s gains have been made in a tighter range (a range that the market is comfortable maintaining) and it seems evident that the trade is reflecting little fear from the fundamentals, regardless of the storage level being 672 Bcf below last year. In 2017, prices rallied up to $3.431 in early May. Looking at the current complacent price behavior, without some fundamental motivation (such as higher power demand), the summer’s price action will likely be more muted than 2017.
- Sunoco attempting to continue ME2 HDD work in Huntingdon County, PA last week came to another halt, contractors reported less than one gallon of non-toxic drilling mud (bentonite) went missing. The PADEP either sending a message – or leaving no room for error.
- Keyera Corp announced an infrastructure development and midstream service agreement with Encana Corp, in which they will team up to develop a gas processing and liquids stabilization plant near Grand Prairie, Alberta, to support Encana’s Pipestone Montney condensate development (33 MBbls/d of condensate processing capacity and 170 MMcf/d of gas processing capacity).
- Inventories decreased 1.2 MMBbl in last week’s EIA report. Propane stocks now sit at 35.6 MMBbl, roughly 8.7 MMBbl lower than this time last year and 10.2 MMBbl lower than the 5-year average. Expected colder weather in the central US in the first week of April may be the only hope against the forecasted first propane build of the year this coming week.
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