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• Inventory levels for crude oil increased by 5.3 MMBbl last week as reported by the EIA. The gasoline and distillate inventories increased 0.7 MMBbl and 0.3 MMBbl respectively. The higher than expected crude oil build was due to higher imports (up 981 MBbl/d) which was slightly offset by higher refinery runs (up 309 MBbl/d). The most important number to keep an eye on, total petroleum inventories, increased by 7.1 MMBbl, which erased a similar decline from the previous week. Overall, the report was bearish, as the increase in crude oil stocks was larger than expected and the growth in gasoline was unexpected. The news was overshadowed on Wednesday, however, as Russia said it expected an OPEC agreement shortly after the EIA release.
• Significant news hit the market this week:
1) OPEC announced that their production increased 240 MBbl/d to 33.64 MMBbl/d according to secondary sources. Although this is the official number that OPEC uses when referring to their production levels, the numbers they collected through direct communication with members lists production at 34.61 MMBbl/d. This highlights just one of the many uphill battles that OPEC will face when setting and enforcing quotas. Members do not agree on each other’s’ production, meaning negotiations will start from different base production assumptions.
2) OPEC is proposing that Iran cap production at 3.92 MMBbl/d, which is lower than the 4.0-4.2 MMBbl/d production target that Iran has repeatedly voiced to the market. A deal is highly unlikely without Iran, as geopolitical rival Saudi Arabia has even threatened to increase production if Iran does not participate.
3) The data that IEA released the prior week showed that the ~250 MBbl/d average oversupply in Q3 grew in October as production grew 800 MBbl/d. IEA forecasts also showed an expected 1.2% year-over-year demand growth for 2017, which would be the lowest year-on-year growth rate since 2011. If OPEC can’t agree on or enforce quotas, the oversupply will last into the 2H2017.
4) China released data the prior week showing that imports fell to 6.8 MMBbl/d in October from a record 8.1 MMBbl/d in September. The decline was a function of lower imports into strategic reserves and by teapot refiners. As teapot refiners have reached or are near import quotas, the lower demand levels are expected to last through the end of the year.
5) The rise in the US Dollar this past week provided pressure on the crude trade. Yellen’s comment’s that an interest rate hike could happen soon sent the dollar to its highest level since 2003 against a basket of currencies.
6) Baker Hughes reported on Friday that the rig count increased by 20. The large increase indicates that producers are comfortable with comparatively lower breakeven thresholds (as a result of continued efficiencies), and likely placed hedges when prices reach the high-$40/Bbl to low-$50/Bbl range. Improved economics and hedge coverage will continue to bring additional rig activity back into the US unconventional plays. The US rig count is now at a level where production growth will resume.
• Despite the increased rig count, and troubling signs with demand and supply, the bullish news overshadowed the bearish last week, and the market closed a dollar higher week-on-week. Price action took prices down below the September lows for a brief time before finding support and rallying up to the high end of the range. Prices bounced off the support level and the market was running higher before the bearish storage release, but Russia’s assertion that OPEC would succeed in cutting production prevented a slide and brought buyers into the market. The trade is still range bound with both the downside and upside being expanded slightly ($42.20-$46.58/Bbl WTI). Expect OPEC to dominate the news and shape trade until the OPEC meeting produces a verdict on the proposed cuts.
• Total natural gas supply increased week-on-week by 200 MMcf/d driven by higher production in the Northeast. Dry gas production has recovered from October lows because Northeast basis recovered to an average of ~80 cents back from Henry, compared to $2.00 back in October. November to-date production is ~1 Bcf/d higher than October. Canadian imports were unchanged last week.
• Demand for natural gas increased by 2.7 Bcf/d last week due to weather. Res/Com and Power had the largest gains, 2.0 and 0.4 Bcf/d, respectively. Weather forecasts for the upcoming week have dropped to near-normal and are expected to push demand up next week.
• Although the storage report last week was at the midpoint of analyst’s projections, broader market consensus was expecting a slightly lower injection number and prices came down as a result. One last injection is expected this season in Wednesday’s report (early release due to Thanksgiving holiday). The market is currently anticipating an injection in the 10’s Bcf and similar size to last year’s build.
• Prices started strong last week and held the gains by the end of the week despite the bearish storage report, showing a strong gain of $0.30 MMcf/d week-on-week. As previously discussed here, the fundamental forecasts have built in a negative bias to prices for the last three weeks and any variance to those expectations will be met with volatile trade. A significant source for the selling during the Oct and early Nov was a change in the position of the Managed Money participants as reported by the Commitment of Futures Traders report. From the Oct 18th report to the Nov 15th report, this group reduced the Long position by 56,000 contracts and increased their short positions by nearly 75,000 contracts. This flip represents nearly a 10% roll of total open interest.
• Prices are expected to move higher this week as more normal seasonal temperatures move in and push demand higher. However, gains are expected to be capped in the short term as any increases in demand will be met by production growth and high storage inventories.
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