- US crude oil inventories increased by 2.2 MMBbl, according to the weekly EIA report. Gasoline inventories increased 0.8 MMBbl while distillates declined 2.6 MMBbl. Total petroleum inventories increased 1.4 MMBbl. US production was estimated to be up 46 MBbl/d. Crude oil imports increased 539 MBbl/d to an average of 8.5 MMBbl/d versus the week prior.
- The WTI trade last week lacked the directional enthusiasm that has gripped the market for the past few months. The same speculative stimuli existed last week, with Venezuelan production lower and continued compliance with OPEC quotas that reinforce declining inventory levels. There was even some additional stimulus from a Reuters estimate that showed Asian oil demand hitting record levels (China’s oil imports reaching record levels of 9 MMBbl/d in April) and additional tension between Iran and Saudi Arabia. However, prices traded within the smallest range since late March, ending lower on the week.
- The market seems to be waiting on the Trump administration’s decision on the Iran deal. Recent price strength came from the belief that Trump will abandon the deal and reintroduce sanctions on Iran. As word was released that French President Macron had outlined an alternative to scrapping the deal, prices softened. As the market heads toward the self-imposed May 12 deadline and negotiations between the various countries continue, trade may become very volatile.
- The range of action within the week’s trade was marked by the bearish inventory release and the bullish expectations of trashing the Iran deal. It was also confirmed in the release of the latest CFTC report, which showed little substantive change in positions. The managed money long positions, which decreased just 5,144 contracts, remain at historically high levels of total open interest. Market internals remained mixed, with volume nearly flat to the previous week and open interest expected to gain slightly.
- The market is in a consolidation period for prices, as traders wait for the next piece of information to drive direction. The speculative long position continues to expect that the Iran deal will be scrapped, sanctions will be brought back into play and the geopolitical uncertainties in the Middle East will continue in the coming months. These interests have now performed two tests of the psychological $70/Bbl level, and both tests have provided ample selling opportunities. Without any increase in speculative shorts or a substantive increase in commercial short positions, this selling can only be attributed to profit taking by the speculative long segment. Expect this type of action to continue in the coming weeks.
- The other side of the consolidation period has traders looking at the continued growth in US production and rig counts. This type of growth will ensure that the US will eclipse the 11 MMBbl/d level later in 2018 as expected. If prices stay at these high levels, US operators will take advantage of the prices and increase CAPEX commitments.
- As discussed previously, there exists the potential for several outcomes this week, given the current consolidation pattern: 1) a blow-off-top type of event based on some critical bullish news hitting the market; 2) an additional series of tests of $70/Bbl met with selling and profit taking, keeping prices in a range; and 3) information regarding tariff discussions and/or the Iran nuclear deal forcing the speculative long sector to start to cover some of the length. Should selling occur, however, don’t expect prices to collapse down to $60/Bbl immediately. The declines will be in steps downward until the information is confirmed. The reassessment of the market to the inevitable fundamentals of supply and demand will direct price action long term and will leave prices in a range on either side of $60/Bbl, barring an outage or supply disruption. Drillinginfo’s expectation is that the speculative long sector’s sell-off will likely set up the market for a potential range of $58-$62 in the next couple of months.
- Natural gas dry production rose last week, gaining 0.52 Bcf/d. This sent the weekly average over the 80 Bcf/d thresholds again. The gains were led by Marcellus/Utica (+0.19), which set another record high in production last week. Canadian imports also increased 0.26 Bcf/d.
- On the demand side, warmer temperatures sent demand levels down, with Res/Com declining by 7.9 Bcf/d and industrial demand declining by 0.75 Bcf/d. Power demand decreased by 0.74 Bcf/d on average for the week. Mexico exports were up slightly at 0.07 Bcf/d, while LNG exports were down by 0.30 Bcf/d. This left the market’s total demand lower by 10.6 Bcf/d, while total supply was higher by 0.78 Bcf/d.
- The storage report last week came in stronger than expected, with an 18 Bcf withdrawal. That is the latest seasonal withdrawal in the last 10 years and will leave the market needing to make up over 100 Bcf for the lack of storage injections during April. This week’s number looks to be the first injection and should be near last year’s injection but below the five-year average.
- The recent trade has been expecting this market to be able to log large injections, with growing production during the spring. With the weather normalizing over the coming weeks, the market will get a sense as to how fast the injections can catch up for the lost month of April. Current production data indicates the growth leveling off and just maintaining previous output levels. With inventory levels at the end of April projected to be around 1.325 Tcf, injections will have to average over 13 Bcf/d during the remaining summer injection season for ending inventories to be at 2017 levels at the end of October. Current weather forecasts do not support those levels of injections for the next two weeks.
- Prices last week started to recognize the dilemma this market may face during summer, as prices eclipsed the March high at $2.811 MMBtu during the expiration of the May contract. Much of those expiration gains were lost in Friday’s declines, but prices did close the week at the highest level since the collapse occurred. One caveat to these bullish internal indications is that last week’s gains came on lower volume (likely expiration induced). While the market did expand the recent range to the upside slightly, market participants did little to change their outlook as the latest CFTC report (dated April 24) showed both the managed money short and managed money long positions decreasing exposure (longs declined 4,192 contracts, while shorts declined 7,561 contracts), likely due to the expiration of the May contract.
- The week closed on Friday, after failing on the break above the March highs, sets up for lower prices early this week. The declines may take prices to levels that test last week’s lows around $2.70, which is well within the recent range. Should price declines extend beyond support from last week’s low, the declines will find additional buying from $2.65 down to $2.565, with major support from the two-year lows at $2.522.
- Should the trade start to realize the enormous amount of gas that needs to be injected in six months instead of the normal seven months and that the early production growth in 2018 is starting to show some leveling, prices will look to last week’s highs for the initial target. The key for any breakout type of rally is to have the run with gains in volume and open interest; otherwise, it is just confirming the recent trade range.
- Earnings season started this past week. Antero Resources reported that there was a minor effect on C3+ pricing due to the Mariner East outage. And if Mariner East II does not come online when expected (July) and is delayed until the end of the year, it would cost Antero about $30 million in cash flow.
- Range Resources, among the top three NGL producers in the country, also commented that the Mariner East shutdown “created challenges for us operationally” and “there was a very slight impact” from the delays.
- Weather, China and Europe, and ethane crackers projects are behind Northeast producers’ demand optimism.
- Enterprise Products Partners also posted results, with a record volume of 6.2 MMBbl/d, and its strongest quarter yet.
- Last week, EIA reported a small draw of 162 MMBbl. Propane stocks now sit at 35.7 MMBbl, roughly 3.9 MMBbl lower than this time last year and 11.2 MMBbl lower than the five-year average.