Strong Demand; Price Strength
- U.S. prices driven up by lower stocks, growing exports
- OPEC deal may be being observed
- Distillate exports setting record highs
- Falling rig counts auger higher prices for natural gas
The Matrix
Erosion of the American petroleum inventory position is tightening availability and could explain much of the ongoing product price strength we are experiencing. A general pattern of declining U.S. inventories, growth of exports and recovery of refining assets have become principal drivers of domestic price. Product demand, most recently at 19.2 million barrels daily has been at an elevated state for over a year, despite many bearish projections.
A sceptic response to OPEC’s claims of a production cut has not held up. Prices have shown steady growth and even sell-offs have been more corrective than truly bearish. One observer notes that Brent spot has been on the rise since January, 2016, and the Brent six months calendar spread has been widening since January, 2015.
Global demand responded bullishly to lower prices early in 2015. U.S. usage has followed suite. And production of crude oil started to slow in 2016 with OPEC cutting back in 2017. Gains in price backwardation support the “rebalancing” theory, with some even calling for global tightening.
Technical charts are bullish; WTI projects gains to $58. Distillate futures could exceed $2.10 on their present track. RBOB has turned bullish too, projecting technically to $2.05. Propane, consolidating now after a steady rally starting in July, could reach $1.25.
One of the more important export stories is the large and expanding share of U.S. distillate finding foreign outlets. EIA noted in a recent release that “U.S. distillate exports have continued to increase significantly over the first part of 2017, setting record highs for three consecutive months from May through July.” (Hurricane activity has since slowed the rate of outflow.) Exports expanded to Mexico and to countries of Central and South America. Economic and political problems in Venezuela and Brazil have contributed to this growth.
Supply/Demand Balances
Supply/demand data in the United States for the week ending October 27, 2017 were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased 5.8 million barrels during the week ending October 27, 2017.
Draws were reported in stocks of gasoline, distillates, and other oils. Builds were reported in stocks of fuel ethanol, K-jet fuel, residual fuel oil, and propane.
Commercial crude oil supplies in the United States decreased to 454.9 million barrels, a draw of 2.4 million barrels.
Crude oil supplies increased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks rose 1.5 million barrels, PADD 2 (Midwest) stocks advanced 1.1 million barrels, PADD 4 (Rockies) stocks grew 0.3 million barrels, and PADD 5 (West Coast) stocks increased 1.4 million barrels. PAD District 3 (Gulf Coast) crude oil stocks fell 6.8 million barrels.
Cushing, Oklahoma inventories increased 0.1 million barrels from the previous report week to 63.8 million barrels.
Domestic crude oil production increased 46,000 barrels daily to 9.553 million barrels per day from the previous report week.
Crude oil imports averaged 7.571 million barrels per day, a daily decrease of 552,000 barrels. Exports rose 209,000 barrels daily to 2.133 barrels per day.
Refineries used 88.1 per cent of capacity, an increase of 0.3 percentage points from the previous report week.
Crude oil inputs to refineries decreased 10,000 barrels daily; there were 16.015 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 44,000 barrels daily to 16.350 million barrels daily.
Total petroleum product inventories saw a decrease of 3.4 million barrels from the previous report week.
Gasoline stocks fell 4.0 million barrels from the previous report week; total stocks are 212.8 million barrels.
Demand for gasoline increased 147,000 barrels per day to 9.461 million barrels daily.
Total product demand decreased 826,000 barrels daily to 19.184 million barrels per day.
Distillate fuel oil supply fell 0.3 million barrels from the previous report week to 128.9 million barrels. National distillate demand was reported at 3.534 million barrels per day during the report week. This was a weekly decrease of 568,000 barrels daily.
Propane stocks increased 0.7 million barrels from the previous report week to 78.3 million barrels. Current demand is estimated at 0.779 million barrels per day, a decrease of 397,000 barrels daily from the previous report week.
Natural Gas
According to the Energy Information Administration:
Weekly net injections exceed the five-year average. Net injections into storage totaled 65 Bcf, compared with the five-year (2012–16) average net injection of 60 Bcf and last year’s net injections of 56 Bcf during the same week.
Working gas stocks appear likely to end the refill season lower than the five-year average. So far during the 2017 refill season, net injections into storage are 16% lower than the comparable five-year average—a 1,724 Bcf increase during the 2017 refill season compared with the five-year average increase of 2,030 Bcf.
Natural gas prices have traced a steady $2.80 to $3.00 range since July. Little commented on, however, has been a slow but steady decline in the rig count. On August 11, 2017, 768 rigs were in operation. This number has since fallen to 729 rigs, reported on November 3rd. This plus growing demand for electricity and continuing growth in exports argue for higher prices. One analyst projects end-2018 prices at $3.50.
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