Supply & Demand Mismatches Can Drive Price Swings
- Petroleum supply response often lags changes in demand
- Producers & refiners attempt to match output to demand
- Four factors likely to influence medium term
- Possible basing action in natural gas futures
Sincerely
David Thompson, CMT
Executive Vice President
Powerhouse
(202) 333-5380
The Matrix
Oil wells take weeks to drill. The permitting process to build a pipeline is measured in years. Constructing a new oil refinery from scratch might take the better part of a decade. Unlike some financial assets which can be created by fiat when needed, the physically complex supply side of the petroleum industry often lags changes in demand. This dynamic can lead to volatile swings in price.
When China’s demand for refined products blossomed in the mid 2000’s, the lack of adequate refining capacity on a global scale led to a period of sustained higher pricing. On the bearish side, the lack of storage at Cushing, OK precipitated WTI futures trading at negative values. The same situation in Edmonton, Alberta has created negative prices for propane.
The global economy continues to rationalize the extremes of the COVID period. This process is fertile ground for supply/demand mismatches in energy. OPEC recently cut its forecast for global oil demand growth for the balance of 2024 as well as 2025. Estimates of crude oil demand growth from the Paris-based IEA are even lower. To be sure, these are only modest declines in the rate of growth, but they come as the cartel may start to bring back more than 2 million barrels a day of production that had been curtailed in the wake of COVID.
Simultaneously, U.S. refiners are adjusting the amount of supply (in this case refined products) they are bringing to the market in response to a 32% slide in the value of the 3:2:1 crack spread margin in the last five months. Despite the media attention that hedge funds get, the overwhelming majority of crude oil is bought by refiners. With refiners planning to run at only 90% of capacity, the lowest level in several years, further weakness in crude oil demand may manifest itself.
POWERHOUSE will be closely monitoring the following factors over the next few weeks.
- OPEC’s decision on rolling back supply cuts
- Chinese energy demand (primarily diesel)
- U.S. refiners’ operational throughput levels
- U.S. gasoline demand (on a year-over-year basis)
The interplay of these influences in the medium-term could determine if energy markets are entering a new phase of supply/demand imbalance.
Supply/Demand Balances
Supply/demand data in the United States for the week ending August 2, 2024, were released by the Energy Information Administration.
Total commercial stocks of petroleum increased (⬆) 1.2 million barrels to 1.2902 billion barrels during the week ending August 2nd, 2024.
Commercial crude oil supplies in the United States were lower (⬇) by 3.7 million barrels from the previous report week to 429.3 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Up (⬆) 1.5 million barrels to 8.8 million barrels
PADD 2: Down (⬇) 0.3 million barrels to 110.7 million barrels
PADD 3: Down (⬇) 4.5 million barrels to 238.3 million barrels
PADD 4: Down (⬇) 0.1 million barrels to 22.8 million barrels
PADD 5: Down (⬇) 0.4 million barrels to 48.1 million barrels
Cushing, Oklahoma, inventories were up (⬆) 0.5 million barrels to 30.4 million barrels.
Domestic crude oil production increased by 100,000 barrels (⬆) to 13.4 million barrels per day.
Crude oil imports averaged 6.224 million barrels per day, a daily decrease (⬇) of 729,000 barrels. Exports decreased (⬇) 1,281,000 barrels daily to 3.638 million barrels per day.
Refineries used 90.5 percent of capacity; 0.4 percentage points more (⬆) than the previous report week.
Crude oil inputs to refineries increased (⬆) 252,000 barrels daily; there were 16.402 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, increased (⬆) 65,000 barrels daily to 16.585 million barrels daily.
Total petroleum product inventories increased (⬆) by 4.9 million barrels from the previous report week, up to 860.9 million barrels.
Total product demand decreased (⬇) 750,000 barrels daily to 19.974 million barrels per day.
Gasoline stocks increased (⬆) 1.3 million barrels from the previous report week; total stocks are 225.1 million barrels.
Demand for gasoline decreased (⬇) 282,000 barrels per day to 8.967 million barrels per day.
Distillate fuel oil stocks increased (⬆) 0.9 million barrels from the previous report week; distillate stocks are at 127.8 million barrels. EIA reported national distillate demand at 3.469 million barrels per day during the report week, a decrease (⬇) of 256,000 barrels daily.
Propane stocks rose (⬆) 0.5 million barrels from the previous report to 87.9 million barrels. The report estimated current demand at 1,032,000 barrels per day, an decrease (⬆) of 316,000 barrels daily from the previous report week.
Natural Gas
Spot Henry Hub natural gas futures prices may have formed a double bottom in the $1.85- $1.90 zone. A move above $2.27 would likely be necessary for further bullish intensity to develop. Above that, $2.38 serves as technical resistance. Seasonal expectations lean toward bullish price action from now until early November. Should $1.85 fail to hold as support, we would expect selling pressure to intensify.
EIA’s Natural Gas Weekly Update for the week ending August 7th reported that the supply of natural gas fell by 0.5 percent. Consumption rose 5.6 percent for the week. Natural gas for power generation added 9.0 percent, reflecting above-normal temperatures in the United States.
According to the EIA:
- Net injections into storage totaled 21 Bcf for the week ending August 2, compared with the five-year (2019–2023) average net injections of 38 Bcf and last year’s net injections of 25 Bcf during the same week. Working natural gas stocks totaled 3,270 Bcf, which is 424 Bcf (15%) more than the five-year average and 248 Bcf (8%) more than last year at this time.
- According to The Desk survey of natural gas analysts, estimates of the weekly net change to working natural gas stocks ranged from net injections of 14 Bcf to 33 Bcf, with a median estimate of 27 Bcf.
- The average rate of injections into storage is 17% lower than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 9.6 Bcf/d for the remainder of the refill season, the total inventory would be 4,136 Bcf on October 31, which is 424 Bcf higher than the five-year average of 3,712 Bcf for that time of year.
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