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The Week Ahead: Harvey Update

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CRUDE OIL
• US crude oil inventories decreased by 5.4 MMBbl, according to the weekly EIA report. Inventories of gasoline were flat while distillate inventories increased by 0.7 MMBbl. Total petroleum inventories declined 1.75 MMBbl. US production was up a slight 2 MBbl/d. The 12 MBbl/d decline in Lower 48 production was offset by Alaskan production growth of 14 MBbl/d. Imports decreased by 885 MBbl/d to an average of 7.9 MMBbl/d versus the previous week.
• The markets interpretation of the bullish data release was overshadowed by the implications of Hurricane Harvey. Harvey shut down over 12 refineries (2.2 MMBbl/d of capacity), including the two largest refineries in the US (Exxon’s Baytown and Motiva’s Port Arthur). While some of these refineries have begun restarting operations, the timeline for the restarts is uncertain. This introduces further uncertainty into the market regarding demand for crude oil and the supply of refined products. Harvey also caused supply disruptions. Gulf of Mexico crude production was down as much as 429 MBbl/d on August 26th. As of yesterday, oil shut-ins were 121 MBbl/d according to the BSEE. Onshore production was also impacted with declines of 300 MBbl/d reported. The net result of the storm will become clearer in the coming week as Harvey hit both the demand side (with associated gasoline prices racing to levels not seen since 2015) and the production side hard. Early estimates indicate that demand dropped more than supply, which would leave price action negative. In other news, OPEC compliance levels fell again in July, causing further bearish sentiment about continued compliance. In bullish news, Libya’s crude production fell 360 MBbl/d due to three fields halting production because of militant pipeline blockades.
• The price action last week seemed to assess that the demand side was the harder hit as prices started the week down testing the initial support area at $45.40/Bbl (late July lows). According to the latest CFTC release, the speculative short positions increased sizably by 82,154 contracts (86.7% increase). Additionally, some of the money managers’ longs positions were liquidated (down 31,582 contracts). This type of action, with the speculative participants well aware of the potential impacts from Harvey, can only be interpreted as price negative for the market. It also sets up the potential for a serious short covering rally in the future.
• Last week’s action clearly defines the potential for volatile trade in crude as the participants sort out the longer-term impacts of the storm. Should the lows of last week fall under additional pressure, the lows from June and July ($42.05/Bbl and $43.65/Bbl) will be the target levels. With the close on the strong side last week, look for early gains this week. Should the speculative shorts be forced to cover, the highs from August ($50.22-$50.43/Bbl) can be easily attainable.
• This week should provide indications of the near-term trade range, but in the longer term, after the market digests the implications of Harvey, Drillinginfo expects the primary range around $45-$46/Bbl to hold the trade as the market’s focus shifts back to inventory normalization again.

NATURAL GAS

• Natural gas dry production decreased last week by almost 500 MMcf/d to 72 Bcf/d. Much of the declines were associated with Harvey and while production in the Gulf of Mexico and South Texas has recovered some of the losses, levels remain below pre-hurricane levels by almost 0.5 Bcf/d. However, total dry gas production averaged 73.5 Bcf/d over the weekend following the partial start of Rover pipeline (0.5 Bcf/d) as well as some gains from the Haynesville (0.4 Bcf/d) and the Rockies (0.25 Bcf/d). These gains are more than offsetting the declines in the Gulf.
• Harvey had more impact on power demand, declining 4.7 Bcf/d, LNG exports declining 0.41 Bcf/d and Mexico exports which declined 0.37 Bcf/d. Total supply fell by 0.78 Bcf/d while total demand declined a significant 6.4 Bcf/d. Harvey continues to impact LNG and Mexico exports. LNG exports dropped to only 0.4 Bcf/d over the weekend (compared to 2 Bcf/d) as LNG cargos are not able to dock into Sabine Pass terminal due to unstable water currents. Mexico exports remain at 4 Bcf/d (vs 4.4 Bcf/d) as a lot of Gulf production remains down.
• The storage report last week came in below market expectations with an injection of 30 Bcf. Price action did not respond immediately following the release but as trade worked through the day, prices went on a run closing above $3.00. Look for this week’s injections to be well above last year’s injections, being around the 5-year average.
• The price action last week was positive for further gains in spite of serious conflicting fundamental indicators. Closing above the 20-week moving average for the first time since the middle of May and closing well above the 50-day moving average, prices rallied just short of the 200-day moving average (closely watched by many speculative traders) and maintained a positive bias through Friday. The problem with the gains is that they occurred on lower weekly volume (Friday’s volume was the highest of the week as prices held the gains from Thursday) and a slight decrease in open interest (Thursday to Thursday — open interest reporting lags by a day). According to the CFTC report (August 29th), the Managed Money participants short position increased 5,974 contracts while the Managed Money long positions decreased 6,052 contracts showing the markets interpretation of the storms impact as negative for prices.
• Price history around the Labor Day holiday (three weeks encompassing) is bearish but in 5 of the last 6 years there has been limited strength either side of the Holiday. However, none of those were coincident with the breaking of important resistance levels that occurred last week. Expect some weakness in prices this week, as prices should test the support levels in the $2.92 area considering the bearish fundamental data. If prices do not try to retest support lower, the market is signaling a change in directional preference in spite of fundamental data points. This upcoming week will define directional price movements for the coming three to four months.

NGLs

• Similar to crude and natural gas, NGL facilities have started to come back online, but operations are not back up to pre-Harvey. Enterprise’s processing facilities including Shoup plant and fractionator and P66’s Freeport export terminal are reportedly back online.

Propane Stocks
• Inventories increased 1.4 MMBbl in last week’s EIA report. Propane stocks now sit at 73.6 MMBbl, roughly 25.0 MMBbl lower than this time last year. However, propane stocks are still slightly above the five-year average of 65.9 MMBbl for this time of year prior to 2015 (before the crude price crash).

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