Oil Prices Lift off Their Lows
1. WTI futures rose about 25 per cent to $54.24 before setting back.
2. Some bullish elements are appearing, including planned cuts in capital spending and reduced rig activity.
3. ULSD typically starts a spring rally in February.
4. Natural gas prices make new lows.
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
Oil futures are prone to exaggeration. Last week’s action was no exception to that rule. Prices had remained flat for much of January. January closed with oil prices staging a rally that brought WTI crude oil up four dollars. This probably reflected short covering and profit taking. February opened with a rally that took prices to $54.24, a three day gain of nearly ten dollar per barrel.
Analysts ascribed the rally to some bullish elements that entered the market. Losses attributed to low crude oil prices led some large producers announcing cuts in capital spending plans. Even though the impact of reduced capex would not be felt for many months, markets reacted immediately.
Other wisps of bullish news were a report of a record decline in U.S. oil rigs. Baker Hughes reported that the U.S. had 1,543 rotary rigs working on January 30th. This was a reduction of 90 rigs from the prior report and 242 rigs fewer than last year.
Technically, the rally was long overdue and came despite few fundamental changes in the petroleum situation. Despite the fundamentally bearish situation, the current price lift could be the start of a corrective rally that could bring WTI to $60 before resuming its downward press.
Traders should also recall that ULSD typically starts a spring rally in February. And gasoline crack spreads lift as well in late winter.
Supply/Demand Balances
Supply/demand data in the United States for the week ending January 30, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum rose 12.0 million net barrels during the week. The largest increase was in crude oil by far.
Gasoline, ethanol, distillate fuel oil, residual fuel oil and other oils had gains as well. Draws were reported for propane.
Crude oil supplies in the United increased to 413.1 million barrels, a gain of 6.4 million barrels. Stocks have been increasing regularly since late September, 2014 when they stood at 356.6 million barrels. The 15.8 per cent gain has vaulted supplies to record levels and cast a bearish tone to the crude oil markets.
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.
Gasoline, ethanol, distillate fuel oil, residual fuel oil and other oils had gains as well. Draws were reported for propane.
Crude oil supplies in the United increased to 413.1 million barrels, a gain of 6.4 million barrels. Stocks have been increasing regularly since late September, 2014 when they stood at 356.6 million barrels. The 15.8 per cent gain has vaulted supplies to record levels and cast a bearish tone to the crude oil markets.
Stocks of crude oil rose in PAD Districts II, III and IV. Gulf Coast crude oil supplies rose 3.7 million barrels, increasing regional supply to 206.0 million barrels. This is well over the EIA estimate of storage capacity and is reflected in further increases at Cushing OK. One source puts Gulf Coast supply within ten million barrels of regional record highs.
Cushing, Oklahoma inventories rose to 41.4 million barrels according to the week’s report. This was an increase of 2.5 million barrels for the report week.
Domestic crude oil production fell marginally to 9.1 million barrels daily. Crude oil imports fell slightly during the week, remaining at 7.4 million barrels per day.
Crude oil inputs to refineries added 288,000 barrels daily; there were 15.5 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose to 16.0 million barrels daily, the highest level for this time of year going back at least 25 years.
Refinery utilization added 1.9 percentage points, now at 89.9 per cent of capacity.
Total petroleum product inventories netted gains of 14.1 million barrels against declines of 2.1 million barrels. Gasoline added 2.3 million barrels to supply. PAD District I had an increase of 4.2 million barrels, offsetting declines in the Midwest.
Total product demand fell 1.873 million barrels daily to 18.6 million barrels daily.
Demand for gasoline dropped 580,000 barrels per day. It is at 8.4 million barrels daily. Refinery production fell slightly less than 100,000 barrels daily to 9.1 million barrels daily.
Distillate fuel oil added 1.8 million barrels to supply. Stocks are 134.5 million barrels. National demand for the week was reported at 3.7 million barrels per day during the report week. This was a weekly drop of 883,000 barrels daily for the report week.
Propane stocks fell 2.1 million barrels. There are 67.2 million barrels in storage. This is more than twice its level last year at this time. Current demand is estimated at 1.6 million barrels per day. EIA notes that propane in the Midwest is balanced much better than a year ago.
Natural Gas
According to EIA: Working gas in storage was 2,428 Bcf as of Friday, January 30, 2015, according to EIA estimates. This represents a net decline of 115 Bcf from the previous week. Stocks were 468 Bcf higher than last year at this time and 29 Bcf below the 5-year average of 2,457 Bcf.
Interruptions to supply were experienced on the Rockies Express Pipeline (REX). REX connects Rockies production to eastern consumption areas. REX expects the line to be restored by Sunday, February 8. Eastbound flows on REX from the Rockies, which had averaged 1.2 Bcf/d for January, have fallen to 0.47 Bcf/d.
Notwithstanding the loss of volume, prices continue under pressure. Support at $2.50 is being challenged. If broken, next major support is at $2.17.
Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.Vol. PH 03 NO. 57
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