Week Ahead: Weather and OPEC Continue To Drive Prices

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CRUDE OIL

Inventory levels for crude oil decreased 2.6 MMBbl last week as reported by the EIA. Gasoline stock rose by 0.5 MMBbl while distillate stocks decreased by 0.8 MMBbl. Total petroleum inventories decreased by 2.0 MMBbl. The withdrawal was due to the lower imports (7.4 MMBbl/d), down 943 MBbl/d from the prior week. The EIA estimate that domestic production was up 99 MBbl/d was not enough to offset the lower imports. The report was bullish from an inventory standpoint, as the crude oil withdrawal was larger than analyst expectations. However, the rising production estimate sparked concern that US production could grow quickly at WTI prices in the $50-$55/Bbl range.

The market was volatile last week as bullish and bearish news were both prevalent.

  • Bullish: A coordinated OPEC and non-OPEC production cut of nearly 1.8 MMBbl/d continues to be at the forefront of the news driving crude oil prices. The possibility of a successful cut puts a floor on price movements lower and any signs of compliance continue to lead prices higher.
  • Bullish: Non-OPEC producer Oman has let customers in the Asia-Pacific know that they will be cutting deliveries to the region, signaling compliance with their end of the bargain.
  • Bullish: The IEA raised its demand forecast for 2017 by 200 MBbl/d to 1.4 MMBbl/d due to revisions to Chinese and Russian consumption numbers.
  • Bullish: The IEA said that a successful production cut by OPEC and non-OPEC producers would cause a 600 MBbl/d supply deficit in the 1H2017.
  • Bearish: The IEA reported higher OPEC production for November of 34.2 MMBbl/d, meaning the size of the production cut by OPEC members to meet the 32.5 MMBbl/d quota has grown to 1.7 MMBbl/d.
  • Bearish: OPEC’s own report also showed the cartel’s production was up to 33.87 MMBbl/d in November, up 150 MBbl/d from the prior month.
  • Bearish: Midweek, the Federal Reserve announced a 0.25% rise in interest rates and signaled at a faster than expected rate hike schedule in 2017. This led to a surge in the value of the US dollar, causing affordability and demand concerns for crude oil.
  • Bearish: Baker Hughes reported a 13 rig increase in the US domestic fleet extending the ramp up close to 60% higher than the US rig count observed in early May. Domestic production declines observed in the first half of 2016 have bottomed; expect growing crude production going forward. Any additional rigs will accelerate further production gains, albeit with a lag.
  • Bearish: According to the latest Commitment of Financial Traders report from Friday, the commercial (producer hedging) short position increased by 42,000 contracts. The commercial component represents over half of the total open interest in crude contracts and has increased short positions by 10% since just before the OPEC meeting. This signals that producers are already taking advantage of the higher prices to lock in future returns.

Expect market volatility to continue with news regarding the likelihood of a successful OPEC and non-OPEC production cut. Until the market has solid data for January production from the countries participating in the cut, expect the possibility of a successful cut to keep a floor under WTI prices in the high-$40/Bbl range. At the same time, gains from positive news regarding the cut will remain capped below the mid-$50/Bbl range as US rig count and production has shown that it is ready to react to higher prices with further increases.

NATURAL GAS

Last week, US natural gas production showed a slight increase of 300 MMcf/d and Canadian supplies increased by 570 MMcf/d, as some of the coldest winter weather observed so far this winter hit the market last week. Cash prices were stronger in many areas promoting the increases. This coming week will usher in even colder temperatures and may create issues for production as the temperature declines will extend into the TX and OK supply areas as well as the Northeast.

With colder temperatures hitting the central US last week, total demand spiked to nearly 100 Bcf/d on average (an increase of 1.76 Bcf/d) and well above those levels at the end of the week. The spike was primarily due to gains in Res/Com load, but power demand also rose slightly. With the major decline in temperatures occurring over the weekend and early this week, and covering a broader portion of the country, week-on-week averages indicate stronger demand is likely.

The storage report last week was a withdrawal above expectations sending prices higher initially but the longer term weather forecasts (after the holiday) showed a moderating pattern and put a limit on any additional gains. This week’s storage report may show a rare December withdrawal in excess of 200 and the week after may be even higher depending on how quick a brief warming period (forecasts currently indicating) occurs in the Northeast.

Prices opened lower by $0.163 and remained weak during the week, closing in the middle of the key break out area at $3.366-$3.444 from earlier in the month. While the storage report found a brief rally, it is evident that price action will be driven primarily by weather forecasts in the near term. Last week’s storage report turned the year-on-year comparisons to a deficit and there is the possibility that current inventories compared to the 5 year average will turn to a deficit by the end of December. These pulls on storage so early in the winter brings an acute problem for gas prices. Drillinginfo has been calling for a rise in prices to facilitate additional investment in gas-directed drilling which, to date, has not happened in a significant way. However, the forward strip continues to lag behind the level necessary to incentivize additional gas-directed drilling. Drillinginfo still expects a strong price signal this Winter as storage levels normalize, and Northeast infrastructure additions (and regional production growth) fail to reverse the broader US domestic production’s flat-to-slightly-declining trajectory.

NATURAL GAS LIQUIDS

Propane inventories decreased 3.6 MMBbl last week as reported by the EIA, marking a third consecutive withdrawal. The withdrawals have been driven by the cold weather. Propane stocks now sit at 95.6 MMBbl, roughly 3.4 MMBbl lower than this time last year. However, propane stocks are still well above the five-year average of 63.6 MMBbl for this time of year prior to 2015 (before the price crash).

  • Ethane: Prices had been rising this month along with natural gas, due to cold weather. Prices have given back some gains due to reports that show above-average temperatures out 6-10 days. Prices will largely continue to move with natural gas and weather forecasts. There are also two steam cracker expansions due to start ramping up in the coming months, which will add to the demand for ethane. Additional demand will help shore up ethane prices, but regional ethane recovery will continue to be burdened by the value vs. local transportation and processing cost considerations.
  • Propane: Propane prices have given back recent gains due to the news of warmer weather on the horizon. There are two competing forces at work for propane prices currently. The rising price of crude on the heels of the OPEC production cut announcement has been driving the value of propane up, whereas the warmer weather is causing short-term demand concerns. The value of propane will continue to track with the movement in crude oil prices but the shorter term price gains may be capped by expectations of warm weather.
  • Butanes/Natural Gasoline: C4+ prices have recently experienced an uptick thanks to rising crude oil prices. Price movements will continue to track with crude oil, which have been volatile due to the concerns regarding the plausibility of the OPEC cut and the Federal Reserve interest rate hike decision.

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