- US crude oil inventories increased by 6.2 MMBbl, according to the weekly EIA report. Gasoline inventories increased by 1.2 MMBbl, while distillates declined 3.9 MMBbl. Total petroleum inventories posted a 5.4 MMBbl build. US production was estimated to be up 33 MBbl/d. Crude oil imports increased by 80 MBbl/d to an average of 8.5 MMBbl/d versus the week prior.
- The WTI trade last week remained calm early in the week, with little news until the presentation by Israeli Prime Minister Benjamin Netanyahu accusing Iran of secretly building nuclear weapons. This reversed the selling that followed the EIA’s latest report confirming surging US production and the rallying US dollar. The continuation of the US dollar rally through the week’s end confirmed the divergence from the traditional negative relationship between the currency and oil.
- The recent geopolitical unrest, coupled with production declines from Venezuela, has been providing a bid for prices of late. However, the focus of the market is the upcoming decision on the Iran nuclear deal on May 12. The action in last week’s trade was highlighted by the bearish inventory release and the advancing dollar offset by optimism generated by the potential dissolution of the Iran nuclear deal. The participants reacted to the early-week strength by capturing profits, as the latest CFTC report showed managed-money long positions decreasing by 15,458 contracts. Market internals remained supportive, with volume increasing late last week and open interest expected to gain slightly.
- The market is heading directly toward the psychologically important $70/Bbl level with intentions of breaking through the top of the current price range. Last week’s close at $69.72/Bbl marks the highest weekly close since the price collapse in November 2014. These high levels confirm that the market has already factored in the expectation of Iranian sanctions being reinstated. Other OPEC nations may increase production levels to offset losses from Iran, thereby muting the dramatic expectations built into prices currently. The other element of risk associated with current prices is some modified extension of the deal to allow European leaders to address their concerns with the Iran deal. Either of these outcomes will lead to immediate pressure on prices.
- The long-term outlook for the market focuses on the rapid and 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 long as prices stay at these high levels, US operators will continue to take advantage of the prices and increase CAPEX commitments.
- Should prices continue their upward move heading into the Iran decision, it becomes more likely that the market will head into a “blow off” type event where the trade has a bullish bias, driving selling to unsustainable levels. Clearly, the current bullish bias has the US pulling out of the Iran deal. Now speculative traders must assess an exit strategy for their collective length. This may lead to a series of rallies and sales, keeping prices between $66/Bbl and $73/Bbl for a short period. Longer term, what the Iran deal looks like moving forward will have a large impact on prices and where they may end up. Should the deal not impact supply as much as expected, the market will inevitably look at the balance of supply and demand to direct price action, which will leave prices in a range on either side of $60/Bbl.
- Natural gas dry production rose last week, gaining 0.4 Bcf/d. This sent the average, on the week, to record levels over the 80 Bcf/d. Canadian imports also increased 0.07 Bcf/d.
- On the demand side, spring-like weather had levels down, with Res/Com declining 4.1 Bcf/d and industrial demand falling by 0.4 Bcf/d. Power demand rose by 0.4 Bcf/d on average for the week. Mexican exports were up slightly at 0.09 Bcf/d, while LNG exports were up 0.46 Bcf/d, which left the market’s total demand lower by 3.7 Bcf/d, while total supply was up 0.5 Bcf/d.
- The storage report last week came in stronger than expected, with a 62 Bcf injection. This first injection had the market declining but does not impact the issue that injections will need to average over 90 Bcf every week for the remainder of the injection season for inventories to end October at last year’s levels. The next two weeks’ projections show injections in the 90-100 Bcf range, leading the market to wonder whether production growth can meet the injection requirements.
- The late-winter aspect of trade has limited the ability of prices to decline and retest the major support zones around $2.56-$2.52, bringing a pause in the bear’s declines. Now that storage has flipped to weekly injections, traders are realizing that additional production gains will be necessary for October inventories to reach last year’s levels. Participants should be keenly aware that weekly injections will have to average over 90 Bcf for the remainder of the injection season. That type of injection level will not occur in June-August, as the market will be utilizing natural gas for power generation. Accordingly, new production will be required to meet the ending season levels. The next few weeks should provide key indications of the market’s supply and demand interpretations, as the month of May will provide ample opportunity for large injections.
- Until such time as the directional bias is defined during May, expect the recent trading range that has held the market since February to remain in place. The struggle to attain a definitive bias was confirmed, with the latest CFTC report (dated May 1) showing both, the managed-money short positions increasing 15,746 contracts, while the managed-money long positions decreased 10,602 contracts as prices rallied during the May expiration. This selling by both sectors occurred as prices tested the high side of the range.
- The weak close on Friday suggests additional selling early this week as the market tests the lows of the last two weeks, around $2.70. Additional selling may test the support provided from the lows of June gas in February and March of $2.66-2.63. That said, it has been the behavior of natural gas to rebound from declines to test the high side of the range, which would take prices to $2.84. The key to prolonged gains is that the tests above $2.80 need to be confirmed with gains in volume and open interest.
- Mariner East I finally resumed operations after the PA Public Utilities Commission ordered operations to begin. Earlier this year, on March 7, the pipe was shut down as a precautionary measure after three sinkholes were found. Shippers can now resume sending those molecules to Marcus Hook for export after seeing two months’ worth of discounted netbacks from transportation expenses.
- PA DEP issued another violation on Mariner East II, after Sunoco Pipeline did not file initial reports of a drilling fluid discharge in Burrell Township, PA. The company was fined about $350,000.
- NGL production increased 59 MBbl/d in the week ending May 4th. A large portion of that coming from PADD 3 pre-rejected ethane production in the Gulf Coast, Texas, Louisiana, and New Mexico
- Inventories this past week reported a build of 660 MBbl in last week’s EIA report. Propane stocks now sit at 36.4 MMBbl, roughly 3.3 MMBbl lower than this time last year and 11.5 MMBbl lower than the 5-year average. EIA reported a Mt. Belvieu propane spot price of $0.963, up about $0.15 since mid-April.
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