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THIS WEEK'S TOPIC:
CRUDE PRODUCTION
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A look at the impact crude production has on propane supply
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Over the past two weeks, Brent crude prices are up about 19 percent. It is the biggest two-week gain since 1998. West Texas Intermediate (WTI) is up only half that much over the same time. One reason is the recent rapid build in U.S. crude inventory.
Recently, WTI crude prices have been choppy, with traders reacting to the inventory builds shown above one day and then reacting to expectations of reduced U.S. crude production the next. Every time a major oil company announces a cut in capital spending, which primarily affects drilling activity, crude prices rise.
Perhaps the single most important factor to watch concerning the sustainability of any crude rally would be U.S. crude production. As U.S. production goes down, actual inventory will become less of a factor. Markets will simply assume a decrease.
The same occurred with propane prices this past summer and fall. Even though inventory was at record highs, it was largely ignored because of the assumption that exports, crop drying, petrochemical use and winter demand were going to quickly dry up the excess supply through the winter. In the case of propane, the large drop in inventory did not occur, and prices eventually plummeted.
A reduction in crude inventory may be more certain, however, with what is currently happening with production and drilling activity.
This past week, U.S. crude production went down. If a downward trend on production develops over the next few weeks, look for the floor in crude to be firmly established and some of the volatility to leave the market. Monitoring the trend in U.S. crude production is highly critical and perhaps most important to follow at this point.
Speculators already want to bet on this happening, and the strong run-up in crude prices have been occurring recently. However, without sound fundamental support, the market is just as likely to sell off following a bounce higher. A developed downtrend in U.S. production may be all that is needed for a sustained neutral-to-higher trend to be established for crude prices.
That downtrend is coming; it is just a matter of time. Drilling rig activity is dropping rapidly in North America. The following is a summary of the data oilfield services provider Baker Hughes released for the week ending Feb. 6 concerning North American drilling rig activity:
• Active U.S. land drilling rigs fell by 85 to 1,397 for the week.
• Total land rigs are down 299 from the same week last year.
• Rigs working in the Gulf of Mexico were up one to 48, off six from the same week in 2014.
• Rigs working in Canada were down 13 to 381, which is off 240 from the same week in 2014.
• There were 1,837 total active rigs in North America, down 100 for the week and down 555 from the same week last year.
• Rigs drilling for oil fell by 83 to 1,140, which is down 276 from the same week last year.
• Rigs drilling for natural gas decreased by five to 314, down 37 from this week last year.
The downward trend in drilling activity is likely to continue. If it does, crude production will continue to be negatively affected and that will eventually begin to bring down the record-high inventory.
The risks for higher crude prices definitely are increasing. Following the data mentioned in this Trader’s Corner is critical to making good decisions concerning propane supply purchases.
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WEEK IN REVIEW
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Propane prices followed crude for the week. Fundamentals remain bearish for propane, but right now this is a crude trade. Crude has upward momentum as sharp falls in U.S. drilling rig activity are encouraging crude speculators to buy. We are going into this week bullish.
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LAST WEEK'S HIGHLIGHTS
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Propane surged sharply higher after falling behind the late run in crude on Friday. The decline in crude drilling rig counts reported by Baker Hughes continued to drive crude higher.
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Propane prices surged to new highs for 2015, as it followed crude higher. Crude was up more than 7 percent, primarily on a sharply falling U.S. dollar. A strike by U.S. refinery workers and threats to Libyan crude supplies due to factions fighting for control of that country added support.
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Bearish inventory data for crude, gasoline and propane sent prices down sharply, reversing a good share of the gains made on Monday and Tuesday. Propane inventory declined just 2.1 million barrels, short of the five-year average draw of 2.9 million barrels. Crude inventory jumped 6.3 million barrels, about double expectations.
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Cold weather in the higher-consuming eastern part of the United States and rebounding crude pushed propane prices higher again. Propane went up about half the percentage gain in crude. Crude was up on news the Chinese government would support its economy by reducing bank reserve requirements.
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A surprisingly big surge in propane prices closed out the week. Propane moved up more sharply than rebounding crude, perhaps making up for the lag on Thursday. Propane trading volume was not high and fundamentals were not supportive. It looked like sellers were simply trying to leverage the cold weather support and make buyers come to their prices.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an e-mail service that provides:
- Three daily price Flash Wires
- Periodic option quotes
- Wednesday inventory data updates around 11 a.m. ET
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Evening report with executive summary, weather maps and complete review of energy prices that are based on propane's Btu equivalent
For a free 10-day trial subscription by e-mail, sign up online here or call 888-441-3338.
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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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