Oil Prices Turn Bearish.
- Supply factors contributing to price weakness include Saudi Arabia cutting price rather than cutting output to support prices.
- Demand overseas has been inhibited by strength in the dollar.
- US oil exports reached a 57-year high in July.
- Distillate fuel oil accounts for 31.3 per cent of crude oil inputs to refining.In 1985, distillates were only 20.4 per cent of inputs.
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
Petroleum prices ended the week of October 3rd on a soft note. Crude oil and product values all fell. WTI crude oil broke support, settling at $89.74. Distillates reached $2.6163 and RBOB settled for the week at $2.3785.
Analysts are turning more bearish, with a $3.00 retail gasoline price being bruited about. The spot gas crack is trading $10.10. Technical analysis suggests that WTI could reach $82.50.
Several factors are contributing to the collapse in prices. Saudi Arabia has dropped selling prices. The Kingdom has traditionally been the global balance wheel for oil prices, reducing output as needed to support prices. This is a notable change in policy. Moreover, Iran may add another one million barrels to world stocks if agreements on nuclear power lead to a lift of oil sanctions.
Strength in the US dollar threatens to slow foreign demand. And domestically, gasoline demand has suffered with changes in national demographics.
Bearish news has taken hold of oil markets. The important question now is how long prices will dwell at current levels – or even lower. We will return to this question in the weeks to come.
Supply/Demand Balances
Supply/demand data in the United States for the week ending September 26, 2014 were released by the Energy Information Administration.
Total commercial stocks of petroleum fell, taking 5.8 million net barrels from stocks. Increases were reported in supplies of kero-jet (+0.2 million barrels.) Gains were also seen in propane (+0.4 million barrels) and fuel ethanol.
Distillate fuel oil supplies fell 2.9 million barrels. Inventory reductions were also reported in crude oil (-1.4 million barrels,) and gasoline (-1.8 million barrels.) The reduction in crude oil inventories continues the slide since early May when crude oil stocks were at 397.6 million barrels.
Product export growth is central to understanding the fall in crude oil stocks. The Energy Information Administration reported that US petroleum exports reached a 57 year high in July. Even crude oil, generally restricted from export, has shown growth. In July, crude oil exports reached 401,000 barrels daily. July was the second consecutive month that crude oil exports were the highest since March 1957.
Commercial crude oil stocks were 356.6 million barrels during the report week. Stocks are now 1.4 million barrels behind last year at this time. Most of the decline in crude oil stocks occurred on the Gulf Coast where 2.2 million barrels were lost to inventory. East Coast inventories fell 1.4 million barrels. Inventories in the Midwest lost 1.1 million barrels. Cushing, OK stocks added 0.3 million barrels to reach 20.5 million barrels. Stocks at Cushing apparently stabilized during September. A further build might suggest that domestic stocks are rebuilding. A reallocation of crude oil followed opening of transportation assets that took oil from Cushing to the Gulf Coast.
Crude oil inputs to refineries were lower by one half million barrels daily, running at 15.7 million barrels per day during the report week.
The high intensity of refinery demand for crude oils showed its first weakness in many weeks. It was reflected in a utilization rate of 89.8 per cent. This was a weekly decline of 3.6 percentage points. The reflects the first indication that the fall refinery turnaround, may be in play, bullish for products.
Total supplies of crude oil and products stand at 1.134 billion barrels of oil. Current supply of all oils has moved ahead of last year by 8.1million barrels. Nearly 12.5 million barrels of the difference is in propane. Gasoline, on the other hand, lags last year by 11.2 million barrels.
Crude oil imports were 7.3 million barrels daily during the report week. Imports were up more than 0.4 million barrels daily for the report week. They lag last year by 6.3 per cent from the same four-week period last year.
U.S. crude oil production reached 8.9 million barrels a day according to the latest report. A modest decrease was reported for Alaska. The Lower 48 states produced 8.3 million barrels daily.
Gasoline production fell to 9 million barrels per day. Gasoline demand was slightly lower for the week at 8.7 million barrels per day. The decline in gasoline stocks of 1.8 million barrels brought inventories to 208.5 million barrels. Decreases were seen mainly in PADD I, where supplies fell 1.9 million barrels during the report week.
Distillate fuel oil supplies fell 29 million barrels during the report week. The declines were seen on the Gulf Coast. The East Coast added 0.8 million barrels of supply. Supplies in the U.S. are 3.5 million barrels below last year’s levels.
Distillate fuel oil demand rose 367,000 barrels daily to 4.117 million barrels per day. Refinery production of distillate fuels rose to 4.907 million barrels daily.
The growing importance of domestic distillate fuel oils in petroleum supply balances can be seen in the chart below. Output has more than doubled since the mid 1980’s. Distillate fuel oil now comprises 31.3 per cent of crude oil inputs. Distillates accounted for 20.4 per cent of inputs to refining in October, 1985.
Propane inventories rose only 0.4 million barrels in the U.S. Total stocks are 79.6 million barrels, 12.5 million barrels more than last year at this time. Gulf Coast stocks are 42.5 million barrels, up 0.3 million barrels for the week. Midwest stocks were unchanged at 28 million barrels.
Natural Gas
According to EIA: Triple-digit net injections into storage were much higher than average. The net injection reported for the week ending September 26 was 112 Bcf, 27 Bcf larger than the five-year average net injection of 85 Bcf and 13 Bcf larger than last year’s net injection of 99 Bcf. Net injections were last in the triple digits 10 weeks ago and only exceeded this week’s level three other weeks so far in this injection season. Working gas inventories totaled 3,100 Bcf, 373 Bcf (10.7%) less than last year at this time and 399 Bcf (11.4%) below the five-year (2009-13) average.
There currently are five 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 3,477 Bcf, which, as of September 9, would require an average injection of 75 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.
Prices remain in a very narrow range for the period since July 17th. Support is at $3.75 but resistance at $4.08 was pierced, reflecting cooler weather. Most recently, prices have moved below that level, back into the range.
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