The Saudis Start a Price War
- October oil prices were pummeled by changes in both supply and demand for oil
- ULSD had a weekly range of fourteen cents
- Gasoline has had a monthly range of 57 cents
- Natural gas prices are in a bearish phase; nonetheless, last winter’s rally was the result of distribution challenges, not inventory
Click chart to enlarge
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
The sharp selloff in oil prices rested at week end with a slight lift off the lows. October has experienced dramatic reductions in the value of petroleum, based in large part on unexpected events. The markets have known about the build in U.S. inventories of oil and gas; this has been priced into the value of oil and gas.
What the markets did not expect were sharp reductions in the economic well-being of Europe cutting into product demand. The markets did not expect Saudi Arabia to change its production policy to support market share at the expense of price.
The week ending October 17th ended with broad ranges for products and WTI crude oil. Distillate fuel oil fell to $2.42 during the week, a fourteen cent range. RBOB prices had a similar range. Gasoline’s high price was $2.27; its low was $2.135. During the month of October, ULSD lost 29. 6 cents in value. WTI gave up $15.12 during the month to date.
Press reports state that Saudi Arabia altered its policy, aiming at reducing U.S. oil production. This, however, is a long term objective even if successful. There are, for example, drilled wells that have not been fracked. They should keep production higher for many months.
Moreover, many producers have already hedged 2015 production and can still lock in 2015 profitably. Saudi Arabia has considerable reserves to support its position. The markets should ready themselves for a long battle with plenty of volatility.
Supply/Demand Balances
Supply/demand data in the United States for the week ending October 10, 2014 were released by the Energy Information Administration.
Total commercial stocks of petroleum rose, adding 1.0 million net barrels to inventories. Increases were reported in supplies of crude oil, which rose 8.9 million barrels. This was the third consecutive weekly increase in inventories. Nearly fourteen million barrels have been added to crude oil stocks since the week ending September 26. This reflects refining capacity being taken off line for turnaround. The slowing of global product demand and additional production from traditional suppliers like Saudi Arabia contribute to the inventory build.
A smaller increase was seen in propane (+1.1 million barrels.) Propane stocks are well above last year’s stock level of 66.5 million barrels at this time.
All other petroleum product stocks fell during the report week. Distillate fuel fell 1.5 million barrels. Year-on-year, distillate stocks remain even with last year, alleviating some concerns that inventory was lagging. Nonetheless, supplies are still at the lower end of the five year range for this time of year.
The situation can be seen in the number of days’ supply of distillate fuel oil available. The chart below can be found in Powerhouse’s suite of inventory charts available at http://powerhousetl.com/eia-data/.
Click chart to enlarge
Commercial crude oil stocks were 370.6 million barrels, a weekly gain of nearly nine million barrels during the report week. The gain was largely on the Gulf Coast, where 5.3 million barrels were added to inventory. The Midwest added 2.1 million barrels to inventories.
Stocks are approaching last year’s level; they are only 3.9 million barrels behind last year at this time. Last year at this time, stocks were 5.3 million barrels higher than in October, 2012, the year before.
Cushing, OK stocks gained 0.7 million barrels, now at 19.6 million barrels. Cushing stocks appear to be stabilizing around this level.
Crude oil imports were 7.7 million barrels daily during the report week, unchanged from the previous week. They were 264,000 barrels less than last year. They lag by 8.4 per cent from the same four-week period last year.
U.S. crude oil production reached 8.951 million barrels a day according to the latest report. A modest gain was reported for Alaska. The Lower 48 states produced 8.4 million barrels daily.
Crude oil inputs to refineries were lower by 0.233 million barrels daily, running at 15.3 million barrels per day during the report week. Refinery utilization fell to 88.1 per cent of capacity. This was a weekly decline of 1.2 percentage points.
Gasoline production rose to 9.3 million barrels per day, a weekly increase of nearly 400,000 barrels daily. Last year at this time, production was only 81,000 barrels per day higher.
Gasoline demand was higher for the week at 9.0 million barrels per day unusually high for October. The decline in gasoline stocks of 4.0 million barrels brought inventories to 205.7 million barrels. Reductions were seen mainly in PADD I, where supplies fell 2.6 million barrels during the report week.
Distillate fuel oil supplies fell 1.5 million barrels during the report week. The gains were seen on the East Coast, where 0.6 million barrels were added to supply. Supplies in the U.S. have moved ahead of last year’s levels.
Distillate fuel oil demand rose 212,000 barrels daily to 3.7 million barrels per day. Refinery production of distillate fuels fell to 4.582 million barrels daily.
Propane inventories rose 0.8 million barrels in the U.S. Total stocks are 81.4 million barrels, 14.9 million barrels more than last year at this time. Gulf Coast stocks are 43.4 million barrels, up 0.2 million barrels for the week. Midwest stocks were unchanged at 28 million barrels.
Natural Gas
According to the EIA: Net injection into underground storage moved inventories within 10% of the 5-year average for the first time this year. The net injection reported for the week ending October 10 was 94 Bcf, 16 Bcf larger than the five-year average net injection of 78 Bcf and 15 Bcf larger than last year’s net injection of 79 Bcf. Working gas inventories totaled 3,299 Bcf, 344 Bcf (9.4%) less than last year at this time and 362 Bcf (9.9%) below the five-year (2009-13) average.
There currently are three more weeks in the injection season, which traditionally occurs April 1 through October 31. EIA forecasts that the end-of-October working natural gas inventory level will be 3,532 Bcf, which, as of October 7, would require an average injection of 78 Bcf per week through the end of October. EIA’s forecast for the end-of-October inventory levels are below the five-year (2009-13) average peak storage value of 3,851 Bcf.
The NG marketplace is bearish. IEA expects production to continue at high rates and inventories to be adequate to the start of the withdrawal season, November 1st.
Long hedgers should be cautious. The Relative Strength Indicator, the RSI, a technical indicator, stands at 41.5; it is not oversold. The lower Bollinger Band is moving lower and there is no bullish divergence.
Nonetheless, last winter’s rally was the result of poor distribution capability in the Northeast more than a physical shortage of natural gas. Colder weather could create the same situation next winter.
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