Challenges to the petroleum distribution system were on display last week.
Natural gas was subject to OFO’s and interruption.
Propane was hard to find. And Heating Degree Days for the week were elevated, 64 more HDD’s than normal and 75 more than last year
Severe backwardation in distillate fuel oil prices raises concerns for resupply in the weeks ahead.
Alan Levine
Chairman, Powerhouse
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
Last week’s action highlighted the problem of an underdeveloped distribution system for both petroleum liquids and natural gas. Propane in particular was severely impacted. By Friday, January 24th Midwest was on allocation. Those who filled bulk plants during the spring and summer were first in line for supply.
The intensity and dramatic growth in demand stands out clearly in this chart which can be found at Powerhouse’s suite of supply/demand visuals available on the Company web site at www.powerhouseTL.com .
The longer-term implications of such strong demand are only now becoming known. Interruptions in supply of natural gas have affected Ultra Low Sulfur Diesel stocks, used by interrupted customers as the substitute fuel.
ULSD stocks, some held in storage by utilities for as much as three years, have been used in the most recent cold spell. Replacement of these gallons is problematical in the spring because prices of ULSD are in backwardation this is a problem for hedging. The futures price is lower than cash. February futures settled at $3.2254. March became spot at $2.9983. Replacement of stocks last week put them 23 cents over the current market and prices move lower in every subsequent month through October. The potential for loss inhibits suppliers from replacing inventories and could limit new supplies through the next month or so.
Late winter and early spring are typically bullish times for HO prices. This year, backwardation in prices could be putting a brake on replenishment of significantly reduced supplies and adding strength to price over the year to come.
US Supply/Demand Balances
The Energy Information Administration’s weekly report on US Petroleum Balances was released for the week ending January 24, 2014.
Inventories of crude oil and products fell 3.8 million barrels during the week.
Crude oil added 6.4 million barrels to stocks. This was the first gain in supply since November 22 when crude oil stocks topped at 391.4 million barrels. Over the eight weeks following, stocks of crude oil fell more than 40 million barrels daily.
Distillate stocks fell 4.6 million barrels during the report week. Most of the decline was on the East Coast which lost 3.9 million barrels of supply.
Distillate demand came in at 4.5 million barrels daily, a weekly increase of 745,000 barrels daily. Demand was reportedly the highest since February, 2008. With cold weather continuing this week, observers expect an even higher demand estimate for this week. The highest level of distillate demand reported was the week of January 31, 2003 when it reached 4.926 million barrels daily.
Propane stocks fell 3.6 million barrels during the report week. Demand reportedly fell 96,000 barrels daily. This probably reflected the large number of propane outages that marked the week. Certainly the degree days were more than enough to support a gain in demand.
During the week ending January 29, Heating Degree Days reached 285 (population weighted by LP Gas.) This was 64 more HDD’s than normal and 75 HDD’s more than last year at this time.
Natural Gas
According to the EIA:
Working gas in storage was 2,193 Bcf as of Friday, January 24, 2014, according to EIA estimates. This represents a net decline of 230 Bcf from the previous week. Stocks were 637 Bcf less than last year at this time and 437 Bcf below the 5-year average of 2,630 Bcf.Cold weather in the Northeast severely inhibited natural gas operations. Transcontinental Pipeline (Transco), a major interstate pipeline running from the Gulf Coast to Pennsylvania and New York, declared a system wide operational flow order (OFO) on Monday, January 27th, in order to manage system imbalances and handle intraday volatility. At Transco’s Zone 6 trading point serving New York City customers, prices rose above $90/MMBtu on Monday before dropping back to $27.86/MMBtu the following day and to $14.26/MMBtu Wednesday.
Natural gas in underground storage could fall below 1.2 Tcf by the end of the withdrawal season at the end of March according some analysts. To bring supplies back to the October 2013 level, at the start of the withdrawal period, would require more than 2.5 additional Tcf of natural gas.
Entering the 2014-2015 heating season with low stocks could move prices substantially higher. Interestingly, about 35 per cent of the 2014 production planned by E&P companies has reportedly been hedged already, according to the Wall Street Journal.
Late January’s action is evidence of the fragile structure underlying energy distribution in the United States. Analysts have expressed concern that disruptions and price spikes will become more frequent, especially during winter. Competition for natural gas for space heating may take precedence over natural gas otherwise used as fuel for electricity generation.
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. 05
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