Oil Price Trends Unclear With Contradictory Signals in Play
- Potential tariff imposition by U.S. and China creates uncertainty
- Outlook for RBOB turns bearish as Renewable Fuels Standard (RFS) is weakened
- OPEC production cuts remain in force
- Natural gas struggles to break out to new highs.
The Matrix
Energy markets have been hit by a plethora of price-moving activities recently, some bullish, some bearish, all complicating analysis of price trends. They include proposed imposition of tariffs by the United States and retaliatory imposts by China. EPA has granted relief from biofuel regulations for several refiners. OPEC continues to meet production cut objectives, a third factor to be considered in determining price trends.
Imposition of these tariffs by the United States would represent a significant shift in American foreign trade policy. The list of products impacted is around 1,300 items. This is in addition to tariffs on steel and aluminum. And China has identified 128 U.S. products on which it will load tariffs.
The situation is extremely fluid and subject to a variety of changes depending on current interests of the U.S. executive branch. Currently, China has announced that imports of propane will be subject to a 25 per cent tariff. In any case, tariffs add a level of cost that should appear in higher price and reduced demand.
This more business-accommodating administration has influenced the Reformulated Fuels Standard (RFS) as well. The Environmental Protection Agency typically has allowed about seven hardship exemptions from the requirement to buy RINs. (RIN is a number used to track production, use and trading of biofuel.) EPA has now exempted 25 refineries from this requirement. If this is a precursor, EPA could effectively shrink this cost, lowering gasoline costs while ostensibly degrading the environment.
OPEC continues to control crude oil output. March output reached an eleven-month low, its compliance supporting prices. The OPEC group produced 32.19 million barrels daily in March. This was 90,000 daily barrels lower than in February.
Less production came from Angola, Libya and Venezuela. These shortfalls explained the reduced level of output but it should be noted that lower output was not because of a conscious effort to comply. Rather they contributed to the lower level of supply because of challenges not overcome. Angola’s shortfall reflected natural decline and Venezuela’s drop reflected an economic crisis of massive proportions.
Supply/Demand Balances
Supply/demand data in the United States for the week ending March 30, 2018 were released by the Energy Information Administration.
Total commercial stocks of petroleum fell 3.9 million barrels during the week ending March 30, 2018.
There were draws in stocks of gasoline, fuel ethanol, and k-jet. There were builds in stocks of distillates, residual fuel oil, propane, and other oils.
Commercial crude oil supplies in the United States decreased to 425.3 million barrels, a draw of 4.6 million barrels.
Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks fell 0.3 million barrels, PADD 3 (Gulf Coast) crude stocks declined 7.0 million barrels, PADD 4 (Rockies) stocks retreated 0.1 million barrels, and PADD 5 (West Coast) stocks decreased 2.3 million barrels. PADD 2 (Midwest) crude oil stocks rose 5.1 million barrels.
Cushing, Oklahoma inventories increased 3.7 million barrels from the previous report week to 34.9 million barrels.
Domestic crude oil production increased 27,000 barrels daily to 10.460 million barrels per day from the previous report week.
Crude oil imports averaged 7.898 million barrels per day, a daily decrease of 250,000 barrels. Exports rose 597,000 barrels daily to 2.175 million barrels per day.
Refineries used 93.0 per cent of capacity, an increase of 0.7 percentage points from the previous report week.
Crude oil inputs to refineries increased 141,000 barrels daily; there were 16.936 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 130,000 barrels daily to 17.259 million barrels daily.
Total petroleum product inventories saw an increase of 0.7 million barrels from the previous report week.
Gasoline stocks decreased 1.1 million barrels from the previous report week; total stocks are 238.5 million barrels.
Demand for gasoline fell 4,000 barrels per day to 9.203 million barrels daily.
Total product demand increased 301,000 barrels daily to 21.217 million barrels per day.
Distillate fuel oil supply rose 0.5 million barrels from the previous report week to 129.5 million barrels. National distillate demand was reported at 3.887 million barrels per day during the report week. This was a weekly decrease of 487,000 barrels daily.
Propane stocks increased 0.6 million barrels from the previous report week to 36.2 million barrels. Current demand is estimated at 1.360 million barrels per day, an increase of 34,000 barrels daily from the previous report week.
Natural Gas
According to the Energy Information Administration:
While working gas net withdrawals are somewhat higher than the five-year average, net flows from storage were lower than the five-year average. Net withdrawals from storage totaled 29 Bcf for the week ending March 30, compared with the five-year (2013–17) average net withdrawals of 28 Bcf and last year’s net withdrawals of 4 Bcf during the same week.
The implied net flow for the week, which excludes the effects of a 9 Bcf non-flow-related adjustment in the South Central nonsalt region, totaled 20 Bcf. Working gas stocks totaled 1,354 Bcf, which is 347 Bcf lower than the five-year average and 697 Bcf lower than last year at this time.
Natural gas struggles to break out to new highs. At some point, analysts are saying, prices should move higher on the theory that the best cure for low prices is low prices. Conversion from coal-fired to natural gas-powered electricity seems attractive at current prices. As more gas is diverted, injections would be reduced, leading to higher prices.
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