- US crude oil inventories posted a decrease of 3.1 MMBbl last week, according to the weekly EIA report. Gasoline and distillate inventories increased 3.6 MMBbl and 5.7 MMBbl, respectively. With the build in gasoline and distillate inventories, total petroleum inventories posted a substantial increase of 11.7 MMBbl. US crude oil production decreased 400 MBbl/d last week, per EIA, with the Gulf of Mexico hurricane-related shut-ins. Crude oil imports were down 0.47 MMBbl/d, to an average of 6.8 MMBbl/d versus the week prior.
- Prices softened last week, as impacts from Hurricane Barry were short-lived and prices were unable to maintain the bullish bias developed in the previous week. The IEA report the week prior brought attention to the declining demand growth (the slowest since 2011). The build in global stockpiles during the first half of 2019 brought concerns that a possible supply glut could arise in 2020 regardless of the efforts of OPEC+ to limit supplies.
- Already weak WTI prices received no assistance from the EIA inventory release, which showed a decline in crude inventories but a substantial gain in total petroleum inventories, exacerbated the bearish elements, and sent prices to the lows of the week by Thursday. Gloomy global economic data, especially in Chinese industrial output and retail data showing the slowest quarterly economic output in decades, has now become the primary driver of price movement in WTI.
- The only bullish elements to support a rally are centered on the continuing meddling by Iran in the Strait of Hormuz. On Friday afternoon, Iran redirected a British tanker from international waters to an island off its coast. As expected, this action brought a bid to the crude market going into the close, but by late afternoon, most of those gains fell off.
- Historically, geopolitical unrest and the outright aggressive behavior of Iran would bring significant volatility and bullish results in the price action of WTI. The price action late on Friday gives a strong indication of how the global economy is producing doubts to the speculative trade. That said, the CFTC report released Friday showing positions from July 9 through July 16 shows that the Managed Money long sector (speculating on higher prices) increased positions by a sizeable 44,591 contracts. This report covered the seizure of the Iranian tanker by the UK and the bullish bias to prices two weeks ago. It is likely that the declines brought on by the IEA report and EIA inventory release forced some of the bullish trade to reconsider, thereby fueling some of the declines. The report had little indication of new speculative shorts entering the market, as Managed Money short positions increased short positions by only 1,985 contracts.
- This week, the market will have the latest on Iran’s seizing of the UK tanker to digest. In all likelihood, this will bring additional strength to prices, as it did for a while on Friday. Market internals developed a neutral bias with the weekly declines, while volume showed a significant increase coupled with gains in open interest week over week.
- With the geopolitical unrest and Iran pushing events to potential limits with the West, the market may be headed toward a potentially volatile period. Iran is seeking higher prices and some avenue to bring the crippling sanctions to an end. At this point, it is clear the US is in a different negotiating position, as the US crude oil production growth presents a different dynamic in the process. Continued meddling with UK vessels will likely push the UK toward the US position with regards to the sanctions. It is obvious that the Strait of Hormuz will find escorts for tankers in the coming weeks, which sets up the potential for mistakes to be made by one or more of the participants, which could cause additional issues.
- Prices may extend the movements on Friday up to the recent high range between $60.94 and $63.81, but without full-scale conflict in the Iranian issues, this area will find sellers. Over time, depending on the Iranian actions (or possible negotiations between Iran and the US beginning), the issues brought about by the lack of global economic growth and concerns over the IEA report going into 2020 will bring selling into the price action, forcing a breakdown to the $50.00 area from early June.
- Natural gas dry production showed a decrease of 1.29 Bcf/d. Nearly the entire decline was from the South Central/Gulf region related to the effects and shut-ins from the hurricane. Canadian imports decreased by 0.23 Bcf/d.
- Power demand showed a 1.84 Bcf/d gain on the week, while Res/Com and Industrial demand gained 0.35 Bcf/d and 0.17 Bcf/d, respectively. LNG exports increased 0.05 Bcf/d, while Mexican exports gained 0.03 Bcf/d. These events left the totals for the week showing the market losing 1.52 Bcf/d in total supply, while total demand increased by 2.42 Bcf/d. With the extensive heat this past weekend and extending in some areas early in the week, a brief moderation is forecast for most of the US before the heat returns at the end of the week.
- The storage report last week showed the injections for the previous week at 62 Bcf. Total inventories are now 291 Bcf higher than last year and 143 Bcf below the five-year average. It is likely with the supply/demand level defined above that this week’s injections will be below last week’s injections.
- The results from the storm should find production returning in the South Central areas with national demand still strong. With three to four weeks of serious summer heat available to push demand, the market will start to get a clearer definition of where ending inventories will occur at the end of October.
- Weather forecasts moderate for the coming week. This moderation will be short-lived, according to the weather forecasts, which show a return to above-normal temperatures from the Northern Plains to the East Coast in the coming two weeks.
- The CFTC report was released (dated for July 16), and showed an interesting change in positions. The Managed Money short position reduced their exposure by covering 18,080 contracts between July 9 and 16, while the long position also reduced positions by 13,004 contracts. This may be a sign of the lack of commitment to “sub $2.00” gas by the speculative component.
- Prices broke down from the previous week, as the resistance around $2.49 held firm and prices failing to rise above that area opened the door for a retest of support between $2.30 and $2.263. The market seems to imply that another test of the June low at $2.15 is underway, but whether that test will be during the August prompt or the September prompt is undecided.
- Market internals continue a more neutral bias on the week, as volume was lower as prices declined, but total open interest gained slightly week over week, according to preliminary data from the CME.
- The fundamentals to trade remain bearish and have been consistently bearish throughout the summer. Weather forecasts have changed and show above-average temperatures promoting high power demand in certain regions over the next couple of weeks. The market’s behavior last week indicates another test of the lows; the question regarding “which contract month” remains. Any rally in the coming weeks will have to overcome the selling at $2.49, as witnessed previously, and is unlikely before the August contract expiration. Should the market continue its declines, it will find buyers at $2.15 down to $2.101.
NATURAL GAS LIQUIDS
- Purity product prices bounced up and down this week. Ethane gained $0.019 to $0.170, propane gained $0.006 to $0.464, normal butane fell $0.003 to $0.529, isobutane gained $0.263 to $0.708, and natural gasoline fell $0.022 to $1.133.
- US propane stocks increased ~544 MBbl the week ending July 12. Stocks now sit at 77.5 MMBbl, roughly 12.2 MMBbl and 11.7 MMBbl higher than the same weeks in 2018 and 2017, respectively.
- US waterborne imports of crude oil fell for the week ending July 19, according to DrillingInfo’s analysis of manifests from US Customs & Border Patrol. As of July 22, the data showed PADD 1 falling by over 130 MBbls/d week over week, while PADD 3 was down by more than 475 MBbls/d. PADD 5 waterborne imports appeared flat. Imports from Mexico are still at an elevated level, although they have fallen somewhat from last week. So far in July, US imports of Mexican crude are at their highest levels since August 2018.
- PADD 3 appears to have imported zero Saudi crude last week, which would be the first time this has occurred since the week of May 3.