Production Freeze Uncertainty Rallies Prices
- Objectives of Iran and Saudi Arabia in conflict
- Carve-out for Iran a possible solution
- Weekly U.S. crude oil stock estimate drops for only second time in 2016
- Natural gas in storage ends heating season at record high
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 energy markets have focused on determining what the outcome of the Saudi-Russian production freeze initiative will be. Uncertainties surrounding Iran’s intentions, Saudi Arabia’s taste for competition and even the group’s ability to monitor an agreement have not been resolved.
A meeting of oil producers is planned for April 17th. WTI crude oil prices rallied in February and March on news of a production agreement, topping out at $41.90 on March 22nd. Since then, prices have softened on negative expressions by Saudi Arabia’s deputy crown prince. He indicated unwillingness to freeze output unless other major producers, including Iran, sign on to the deal.
One possibility that could help seal the deal could be allowing Iran to export up to its pre-sanction level of 2.5 million barrels daily before joining the freeze. Ironically, Iran had been a major supplier to India before sanctions. This market is being recaptured by Iran largely at the expense of Saudi Arabia, one explanation of Saudi resistance to a carve out for Iran. There are signs that Iran is having difficulty growing its exports elsewhere. China and Japan are adding Iranian crude oil, but not at the pace earlier expected.
Another reason for weakness in crude oil prices is the reality of growing oil stocks in the United States.
The major take-away from the most recent Energy Information Administration summary of weekly petroleum data related to crude oil. “U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.9 million barrels from the previous week. At 529.9 million barrels, U.S. crude oil inventories are at historically high levels for this time of year.” Lost in that headline was the fact that total stocks of crude oil and petroleum products reached 1.370 billion barrels during the week ending April 1, 2016.
The decline in crude oil supplies was only the second drop this year. It reflects continuing weakness in crude oil production, now just over nine million barrels daily. It may also be a response to a sharp drop in crude oil imports which fell nearly one-half million barrels daily for the report week.
A price rally followed release of the bullish crude oil data. But the likelihood of highs above $42 is diminishing. Elliott Wave analysis is increasingly bearish on that possibility. A move under $35 would effectively end this rally, looking lower.
Supply/Demand Balances
Supply/demand data in the United States for the week ending April 1, 2016 were released by the Energy Information Administration.
Total commercial stocks of petroleum increased 1.1 million net barrels during the week ending April 1, 2016.
Builds were reported in stocks of gasoline, K-jet fuel, distillates, propane, and other oils. Draws were reported in stocks of fuel ethanol and residual fuel oil.
Crude oil supplies in the United States decreased to 529.9 million barrels, a draw of 4.9 million barrels.
Crude oil supplies decreased in three of the five PAD Districts. PADD 1 (East Coast) crude oil stocks fell 0.7 million barrels, PADD 3 (Gulf Coast) stocks decreased 4.4 million barrels, and PADD 5 (West Coast) stocks experienced a draw of 0.8 million barrels. A build in crude oil stocks of 0.8 million barrels was reported in PAD District 2 (Midwest). PAD District 4 (Rockies) crude oil stocks were unchanged from the previous report week.
Cushing, Oklahoma inventories increased 0.3 million barrels to 66.3 million barrels.
Domestic crude oil production decreased 14,000 barrels daily to 9.008 million barrels per day.
Crude oil imports averaged 7.254 million barrels per day, a daily decrease of 494,000 barrels.
Refineries used 91.4 per cent of capacity, an increase of 1.0 percentage point from the previous report week.
Crude oil inputs to refineries increased 199,000 barrels daily; there were 16.433 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, increased 193,000 barrels to 16.615 million barrels daily.
Total petroleum product inventories saw an increase of 6.0 million barrels from the previous report week.
Gasoline stocks increased 1.4 million barrels; total stocks are 244.0 million barrels. This build in gasoline stocks snaps a six week streak of draws. Demand for gasoline decreased 19,000 barrels per day to 9.244 million barrels daily.
Total product demand increased 414,000 barrels daily to 19.868 million barrels per day.
Distillate fuel oil supply increased 1.8 million barrels; total stocks are 163.0 million barrels. National distillate demand was reported at 3.609 million barrels per day during the report week. This was a weekly decrease of 239,000 barrels daily.
Propane stocks increased 2.0 million barrels to 64.9 million barrels. Current demand is estimated at 838,000 barrels per day, a decrease of 232,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working gas in storage was 2,480 Bcf as of Friday, April 1, 2016, according to EIA estimates. This represents a net increase of 12 Bcf from the previous week. Stocks were 1,008 Bcf higher than last year at this time and 874 Bcf above the five-year average of 1,606 Bcf. At 2,480 Bcf, total working gas is above the five-year historical range.
Natural gas stocks ended the heating season at a record high. EIA noted, “Working natural gas in storage as of March 31, the traditional end of the heating season, totaled 2,478 billion cubic feet… 868 Bcf (54%) higher than the five-year (2011-15) end-of-March average, and exceeding the previous end-of-March high set in 2012. Net withdrawals during this year’s heating season, which started on November 1, 2015, were 728 Bcf lower than the 5-year average and 655 Bcf lower than withdrawals last year.”
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