- Inventory levels for crude oil decreased by 0.9 MMBbl last week as reported by the EIA. The gasoline and distillate inventories increased 2.1 MMBbl and 5.0 MMBbl respectively. The crude oil withdrawal was bullish as it ran contrary to analyst expectations of a slight build. The large builds in gasoline and distillate inventories was bearish, however, especially as refinery utilization remained a modest 89.8%. The most important number to keep an eye on, total petroleum inventories, increased by 0.5 MMBbl. Overall, the report had bullish and bearish indicators leading to little change in the total petroleum inventories number. The market brushed off the uneventful report on Wednesday and chose to focus on the OPEC agreement.
- OPEC has agreed to a production cut that will reduce output by 1.2 MMBbl/d. The following table summarizes how they intend to reach the 1.2 MMBbl/d cuts (volumes are in MBbl/d):
- Saudi Arabia will bear the brunt of the cuts. Iraq has agreed to cut although they had previously expressed that they want to remain exempt due to the need for the revenue to fight ISIS. Iran has been allowed to grow production an additional 90 MBbl/d. Nigeria and Libya have been exempted from the cuts. Indonesia’s OPEC membership has been suspended because they declined to participate in the cut. Non-OPEC producer Russia has also agreed to participate by cutting 300 MBbl/d, although their cut will be contingent on technical ability. Russia may not be able to bring back some of that production in the future if they stop production in some of their older fields.
- The jury is still out as to whether OPEC will be able to avoid cheating by its members on the quotas. If the cut is successfully implemented, the oversupply will be corrected by 2Q2017. By 3Q2017, storage inventory levels would be back to normal levels. Therefore, the cuts are only likely to be enforced through the first part of the year. If the cut is successful, expect WTI prices to climb into the mid-$60/Bbl range. It is prudent to keep in mind that US production can grow around 750 MBbl/d by December 2017 if those kinds of prices can be sustained through the year. Additionally, the higher prices get, the more incentive there is to cheat. The market will continue to keep a close eye on the implementation of the quotas as it will continue to dictate the fate of the current oversupply situation.
- As expected with the OPEC agreement, price action was bullish last week as WTI prices broke out of the recent range and tested the resistance from early October at $51.93/Bbl. The rally in WTI has prices extended and momentum indicators are approaching over bought levels. WTI will need some time for consolidation as the market digests the impact and success of the OPEC quotas. The run has also created a new near term trading range with $48.03/Bbl being the low end of the range and the high end has yet to be fully defined. An area that may evolve as the high side for a long-term range, dates back to July 2015 between $53.89/Bbl and $55.34/Bbl. Expect more consolidation in the trade this week and less volatility than last week, barring any additional news regarding the OPEC cuts.
- Natural gas production was nearly flat week over week and Canadian supplies were also flat. With forecasted temperatures moving colder in the coming week, expect Canadian supplies to increase. The cold temperatures are currently expected to move into OK and TX in the coming week, with the lows well below freezing in certain areas. This may have an impact on production as the potential for freeze offs increases.
- Milder temperatures dropped total demand last week below the previous week by 2.7 Bcf/d. Last week’s mild conditions will be reversed in the coming week with the expected cold moving in from Canada effecting not only the Midcon and East but also extending into TX. This pattern should set some of the highest Res/Com demand levels so far this season.
- The storage report last week was in-line with market expectations but prices continued to rally on cooler weather forecasts. This week’s storage report should be well below historical draws due to warmer temperatures seen last week.
- Last week’s bullish price action continued with strong gains on the expiring Dec contract and continued with the Jan contract opening with a $0.12 premium as the trade looked beyond the short-term fundamentals. A key technical area was broken, as prices, initially, tried to close the expiration premium, but found significant buying support that sent prices up to and eventually through a price “gap” that has existed since Jan ’15 at $3.366. The rally in Oct ’16 challenged that same area and the rally failed at $3.367. The significance of this break out sent prices $0.20 higher after the storage release as many traders, selling at that resistance area, were forced to cover their short positions. That same area ($3.367) now becomes the low end of the near term range that prices should trade until additional information either confirms the break out or proves it false. The higher end of the near-term range is the Oct ’16 highs of the Jan contract at $3.675.
- The risks for prices in the coming week are towards the high side. Fundamentals (weather forecasts) are very constructive for price advances and the expectations of this coming week is one of the primary drivers for last week’s actions. The potential for production issues, mentioned above, is a threat to the current supply/demand balance and the result may be significant withdrawals from storage during the coming two weeks.