Are Lower Prices Creating Demand?
- A 48% price drop in crude oil increased production (to meet demand) only 2.1 per cent in 2014.
- U.S. demand for gasoline, k-jet and distillates is running 8.7 per cent over last year to date.
- Cushing OK storage is more than half full.
- Natural gas support now at $2.168 with major support at $ 1.902.
Table covers crude oil and principal products. Other products, including residual fuel oil and “other oils” are not shown, and changes in the stocks of these products are reflected in “Total Petroleum Products.” Statistics Source: Energy Information Administration “Weekly Petroleum Status Report” available at www.eia.doe.gov
The Matrix
Analysis of the crude oil price swoon of 2014 has focused on the production decisions of Saudi Arabia. The Kingdom has made it clear it has no intention of cutting production to support price.
The impact of demand has gotten lost in the noise. And ordinarily, demand would not be an issue: low prices encourage consumption. Enough consumption creates a countervailing pressure and offsets falling prices. Economics 101.
In the current environment, however, the demand side of the equation may not be playing to expectations. Notwithstanding lower prices, some analysts believe that global demand for energy may be peaking. The International Energy Agency reports that “oil supplied 31 percent of the world’s energy in 2012, compared with 46 percent in 1973. Even as oil prices dropped 48 percent last year, the most since 2008, global production rose 2.1 percent to 93.3 million barrels a day.” Explanations include higher fuel efficiency standards, a stronger dollar, higher U.S. production offsetting imports and reduced capital spending in the industry.
The demand situation in the United States is markedly stronger than is the case globally. Demand stimulation is starting to appear. Year to date, essentially during January, gasoline, kero-jet and distillate fuel oil demand is running collectively 8.7 per cent higher than last year. U.S. demand for the report week is 2.3 per cent higher than the comparable week last year.
Supply/Demand Balances
Supply/demand data in the United States for the week ending January 23, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum rose 2.0 million net barrels during the week. The largest increase was in crude oil by far. Ethanol, residual fuel oil and other oils had gains as well. Draws were reported for gasoline, distillate fuel oil and propane. Stocks of other oils dropped 0.3 million barrels.
Crude oil supplies in the United States increased to 408.7 million barrels, a gain of 8.9 million barrels. Stocks are at a record level, going back at least to 1983 on a weekly basis. Older data suggest that stocks were last this high in January, 1931.
Stocks of crude oil rose in every PAD District in the country. Gulf Coast crude oil supplies rose 5.5 million barrels, increasing regional supply to 202.3 million barrels. How close to maximum storage capacity is inventory on the Gulf Coast? Powerhouse looked at this question in April, 2014 (Energy Market Situation, April 7, 2014.) At that time, EIA estimate capacity at 200 million barrels. Other estimates included Morgan Stanley Research which put capacity at 273 million barrels. Either way, it is apparent that Gulf Coast facilities are nearing their maximum.
Cushing, Oklahoma inventories rose to 38.9 million barrels according to the week’s report. This was an increase of 2.1 million barrels for the report week. Gulf Coast storage may be nearing capacity and Cushing is now more than half full. WTI prices are now more than ten dollars in carry between March 2015 and March 2016, more than enough to make storage profitable. This adds to pressure to fill Cushing, pushing prices lower.
Domestic crude oil production gained again, rising to 9.213 million barrels daily. Crude oil imports rose during the week, moving up 0.204 million barrels daily to 7.4 million barrels per day.
Crude oil inputs to refineries recovered following the prior week’s drop; there were 15.2 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose to 15.7 million barrels daily.
Refinery utilization added 2.5 percentage points to 88.0 per cent of capacity. Following the declines experienced during the prior week, such a recovery shouldn’t be surprising.
Total petroleum product inventories netted gains of 10.6 million barrels against declines of 8.6 million barrels. Gasoline lost 2.6 million barrels from supply. PAD District I had a reduction of 1.7 million barrels.
Demand for gasoline rose 170,000 barrels per day. It is at 9.0 million barrels daily. Refinery production fell only marginally, down 38,000 barrels daily, remaining at 9.2 million barrels daily.
Distillate fuel oil inventory fell 3.9 million barrels. Stocks were 132.7 million barrels. National demand for the week was reported at 4.6 million barrels per day during the report week. This was a weekly increase of only 43,000 barrels daily for the report week.
Propane stocks fell 50,000 barrels. There are 69.3 million barrels in storage. Current demand is estimated at 1.6 million barrels per day.
Natural Gas
According to EIA: Working gas in storage was 2,543 Bcf as of Friday, January 23, 2015, according to EIA estimates. This represents a net decline of 94 Bcf from the previous week. Stocks were 324 Bcf higher than last year at this time and 79 Bcf below the 5-year average of 2,622 Bcf.
The withdrawal was below expectations and prices fell following release of the storage data. The March natural gas futures contract reached $2.637 by Friday morning, breaking support at $2.65, last seen in September, 2012.
Additional sub-par withdrawals from storage seem likely in view of moderate winter weather now underway for much of the country. NOAA reported for the week ending January 24, 2015, every region of the United States experienced lower than normal and less than last year’s Heating Degree Days.
Breaking support raises the question of how much further prices might fall. There is some support at $2.168 and even stronger support at $1.902, reached in April, 2012. Elliott Wave analysis, however, does not show a five-wave pattern forming yet. Until it does — and some sort of rally to establish a fourth wave correction has yet to develop – it is difficult to estimate a bottom objective for this market. One analysis suggests $1.52.
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