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The Week Ahead For Crude Oil, Gas And NGLs Markets – June 17, 2019

CRUDE OIL

  • US crude oil inventories posted an increase of 2.2 MMBbl last week, according to the weekly EIA report. Gasoline inventories increased 0.8 MMBbl, and distillate inventories decreased 1.0 MMBbl. The total petroleum inventories showed another substantial increase of 9.3 MMBbl. US crude oil production decreased 100 MBbl/d last week per EIA. Crude oil imports were down 0.3 MMBbl/d to an average of 7.6 MMBbl/d versus the week prior.
  • Prices confirmed the recent trend of weak global demand outpacing the production cuts and geopolitical unrest to drive trader interests. Rarely in WTI trade does the price of crude fail to maintain most of its gains after bullish events, like the two tankers attacked in the Gulf of Oman on Thursday. This type of geopolitical unrest, targeting the shipping lanes, should send prices up at a strong clip. While the action was met with gains immediately, by the end of the week prices had settled back into the middle of a recent range ($50-$55), closing the week at $52.51/Bbl.
  • Early in the trade last week, prices were supported based on Saudi Arabian energy minister Khalid al-Falih’s comments about extending the oil production cuts, with an agreement on the horizon. He went on to say that the only oil exporter undecided on the need to extend the cuts was Russia. Russian energy minister Alexander Novak provided little insight as to where the country stands on the deal, only citing the risk that if oil producers pump out too much oil, prices could drop to $30.00/Bbl.
  • After positive bias early in the week, which set the week’s highs, prices were punished when the inventory report was released. This bearish report, similar to other recent reports, showed US petroleum inventories growing significantly. IEA’s latest oil market report, lowering demand 0.1 MMBbl/d, brought additional negativity to the market.
  • Data points from world markets and equities confirm that both global economic growth and demand for crude are under attack, and market sentiment in WTI is not immune to these factors. Trade tensions between the US and China, which are subduing global economic growth, may be addressed at the upcoming G20 meetings later in June, but neither side has publicly shown a strong interest in resolving the issues. This lack of interest has placed a cloud of uncertainty over the markets, as traders continue to trade out of risk assets that are linked to economic growth (crude, commodities in general, and some equities) and into safety trades like the US Treasury (10-year).
  • The CFTC report (positions as of June 11) brought forth additional selling from the bulls as the Managed Money long component liquidated 24,136 contracts, while the short position added 27,839 contracts. The short speculative sector seems to add to positions on price runs to the high side of the recent range ($50-$55). With the continued gains in the short position of late, uncertainty regarding any solution to the trade issues is directing the positions of traders.
  • The market internals maintain a consolidating trade within the new range. Last week’s trade softened the oversold conditions, as the market closed in the middle of the range on rising volume, while open interest declined. With the strength of prices on Friday, follow-through gains going into this week should be expected. The last two weeks traded to highs of $54.63/Bbl and $54.84/Bbl, respectively, and those levels should find sellers this week. A break above those levels this week will likely challenge the area where prices broke down: between $56.00/Bbl and $57.33/Bbl. Should prices reach this range, selling should accelerate. Declines back to the lows of the past two weeks, at $50.60/Bbl to $50.72/Bbl, will find buyers just like last week. The recent range should hold without significant expansion of the conflict with Iran.

NATURAL GAS

  • Natural gas dry production showed an increase of 0.32 Bcf/d, while Canadian imports decreased by 0.42 Bcf/d.
  • Res/com demand gained 0.09 Bcf/d, while power demand declined 0.98 Bcf/d. Industrial demand dropped 0.03 Bcf/d. LNG exports rose 0.02 Bcf/d, while Mexican exports increased 0.04 Bcf/d. These events left the total supply for the week dropping 0.10 Bcf/d while total demand decreased by 0.87 Bcf/d.
  • The storage report last week showed the injections for the previous week at 102 Bcf. Total inventories are now 189 Bcf higher than last year and 230 Bcf below the five-year average. With the drop in demand being greater than the drop in supply, expect the EIA to report a stronger injection this week.
  • Weather models are showing that summer-like temperatures will be arriving in the southeast and south central regions in the coming two weeks. This will provide the market a good period to evaluate the power demand requirements over the summer months.
  • The CFTC report (as of June 11) showed the Managed Money long sector decreasing positions by 1,751 contracts, while the short position took another aggressive position by adding 40,771 contracts. The chart below shows the position of the speculative short trade position.

  • The level of shorts is now challenging the bearish period of January 2018, but remains 120,000 contracts below the multiyear lows of early 2016. It should also be noted that the Managed Money long position has dipped down to the low levels from early 2016. The market positions of the speculative community show a lack of panic from the longs, while the shorts are adding aggressively to their positions. This situation has the potential for a short covering rally that could catch trade off guard.
  • Market internals continue to show a bearish bias; total volume has increased week over week, while total open interest remained flat (according to preliminary data from the CMS). The quieter trade last week took the momentum indicators out of the extremely oversold levels.
  • The fundamental indicators continue to show strong production, but the market will likely taste summer demand in the coming weeks. Prices look to seek additional declines but have found buyers when they have headed toward $2.30 over the past seven trade days. This area around $2.30 might be the low side of a potential trading range for prices during the July prompt contract until the market fully understands the potential impact of summer power demand. Any rally in prices will run into selling at $2.475 up to $2.573. Should the support area fail to hold declines, probes lower will likely challenge a zone from May 2016, between $2.151 and $2.288.

NATURAL GAS LIQUIDS

  • NGL prices mostly dropped week over week. Ethane fell $0.035 to $0.167, propane was down $0.033 to $0.412, normal butane dropped $0.004 to $0.468, and isobutane was down $0.002 to $0.499. Natural gasoline was the only product to increase, gaining $0.021 to reach $1.019.
  • US propane stocks increased ~2.9 MMBbl during the week ending June 7. Stocks now sit at 71.1 MMBbl, roughly 20.3 MMBbl and 18.4 MMBbl higher than the same weeks in 2018 and 2017, respectively.

SHIPPING

  • US waterborne imports of crude oil fell for the week ending June 14, according to DrillingInfo’s analysis of manifests from US Customs & Border Patrol. The decrease was driven mostly by a drop in imports to PADD 1 and PADD 5. As of June 17, the data showed that PADD 1 imports stood at nearly 590 MBbl/d for the week, while PADD 5 imports were at nearly 1.05 MMBbl/d. PADD 1 imports fell by more than 650 MBbl/d from the prior week. PADD 3 imports rose from the prior week and are at nearly 1.75 MMBbl/d.

  • Total US crude imports from Russia were at their highest level since at least 2017 at nearly 330 MBbl/d. PADD 1 received nearly 90 MBbl/d, PADD 3 received more than 45 MBbl/d, and PADD 5 received nearly 195 MBbl/d. The biggest recipient of Russian barrels was Par’s refinery on Oahu, which imported nearly 150 MBbl/d of Sakhalin Blend and Sokol crude oil originating from facilities in South Korea and Japan.