Week Ahead: Gas Price Gains Expected To Slow Down This Week

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CRUDE OIL

  • Inventory levels for crude oil decreased 2.4 MMBbl last week as reported by the EIA. The gasoline and distillate inventories rose by 3.4 MMBbl and 2.5 MMBbl respectively. In total, petroleum inventories increased 1.4 MMBbl. The EIA report also showed a decline in US production of 2 MBbl/d from the previous week and imports increased 755 MBbl/d to an average of 8.3 MMBbl/d. The report was perceived as bearish, with the builds in gasoline and distillate offsetting the crude withdrawal.
  • Several other issues provided some bearish bias and a pause for traders to assess last week:
    1) OPEC production increased in November to 34.19 MMBbl/d from 33.82 MMBbl/d in October according to a Reuter’s survey. If the increase is confirmed by official OPEC and IEA releases, the OPEC production target of 32.5 MMBbl/d will become harder to attain as the size of the cuts must be larger.
    2) Libya and Nigeria were exempt from the quotas and they each have significant offline production (compared to recent and historical levels) that could come back on line. Increases from either country will depend on their ability to maintain political stability, and avoid terror attacks on key crude production and export infrastructure. Nigeria has already said they hope to boost production by 200 MBbl/d in January.
    3) Regardless of the quota news, Saudi Arabia continues to fight for market share as Aramco cut their selling price to Asia for January. It remains to be seen if the focus will shift to Asian market share in lieu of exports to the US (given the recent increased exports from Russia to China), or if Saudi Arabia will pursue both markets.
    4) Baker Hughes reported a large rise in the rig count as 27 rigs were added. The rise shows the flexibility of shale producers to make moves when prices permit, but the production associated with the higher rig count will come with a lag.

  • OPEC and non-OPEC members met on Saturday to finalize a deal for countries outside of the cartel to contribute 558 MBbl/d to the cuts. Russia will reduce production by 300 MBbl/d from the October high of 11.247 MMBbl/d gradually over the coming months. Russia is targeting a production level of 10.947 MMBbl/d at the end of March. Beside Russia, Kazakhstan and Oman have also agreed to cut 20 MBbl/d and 45 MBbl/d respectively. The rest of the countries involved in the talks were not expected to grow production and were already facing natural declines. The agreement for those countries simply puts the natural decline numbers on paper. The deal is bullish for prices, as this is the first deal of its kind between OPEC and non-OPEC participants since 2001. The combined cuts, if successful, would take at least 1.758 MMBbl/d out of the market by the end of 1Q2017.
  • As discussed here last week, prices consolidated during the week and volatility declined well below the prior week. The rising price movement from November 30th to December 6th was fueled primarily by the reduction in short interest and addition to length by the managed money segment of the market, according to the latest CFTC report. These two components provided nearly 84,000 contracts of buying (4% of total open interest). With price action calming last week post OPEC actions, the high side of the new WTI price range was established at $52.42/Bbl below the highs from July 2015 between $53.89/Bbl and $55.34/Bbl. As of this writing, the 2015 highs are already being tested with prompt month trading near $53.75 on the non-OPEC production cut news from Saturday. Despite this new higher price test, expect doubts about the quota agreement and the other bearish fundamental issues to limit the market’s ability to garner the support necessary to remain at these levels this week. Should the expectations of the market grow concerned about the quotas and the adherence to the deal, then initial declines to $48.00/Bbl should be expected and possibly, down to $46.00/Bbl.

    NATURAL GAS

  • Natural gas production losses of 800 MMcf/d week-on-week were partially offset by gains in Canadian imports of 500 MMcf/d. Some of the declines in production can be linked to freeze offs as significant temperature drops occurred in the Rockies and Mid Continent. With even colder temperatures coming this week, additional production declines are expected, particularly in the Northeast as the colder temperatures expand into the region’s supply area.
  • Total demand rocketed last week with the cold temperatures and reached some of the highest levels since last February. Most of the gains were in the Res/Com sector (gaining an average of 10.2 Bcf/d), however, power demand also rose over 2 Bcf/d week-on-week as the cold temperatures hit TX and the Gulf area where some of the homes rely on electric heat.
  • Price action continued the previous week’s bullish bias, closing higher for the week and at levels not seen since Dec ’14. The recent run has extended the momentum indicators into the extreme over bought levels. While the gains can continue, there will eventually need to be a period of either consolidation or slight correction. The bullish run though, has shown no indication of being ending as the gains since the Thanksgiving holiday have occurred with increasing volume and open interest, indicating higher prices may still be in the future. The gain in open interest is even more indicative of the market’s expectations of higher prices as it has occurred with a reduction in short positions (open interest typically declines when traders are forced to cover short positions) of 37,000 contracts by the managed money segment (speculative community), according to the latest CFTC data.
  • The weather forecasts for the upcoming two weeks remain supportive of further price advances. Three-digit storage withdrawals are expected over the next 4 weeks including a potential 200+ Bcf weekly draw in next week’s release. From a technical perspective, major resistance should limit gains in the near term between $3.93-$4.04.
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