Crude Oil Comfortable Under $100

  1. Long Term weather expectations are changing. The likelihood of hurricanes this year is diminishing, El Nino is less likely as well.
  2. Crude oil remains solidly under $100 and could move to $86.
  3. Gasoline demand defied expectations and moved to an annual high.
  4. Natural gas injections are slowing. It will take weekly additions of 112 Bcf to reach the average of the past five years on October 31st.

 

Al pic 2009_cropped

Sincerely,

Alan Levine
Chairman, Powerhouse

Power1

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 was characterized by low volatility for WTI crude oil. Spot futures ranged only $2.12, high to low, remaining solidly under $100 despite continuing uncertainty on the geopolitical scene. September WTI settled at $97.55. This is a critical level, sitting just above an uptrend line beginning late in June. A break of that level invites lower prices in the days ahead. In addition, WTI appears to be forming a head and shoulders formation that could bring prices to $86.58.

Hurricanes are one of the important weather features of the summer. NOAA has revised its estimate of this year’s hurricane potentials. The agency has raised the likelihood of a below-normal season. NOAA now estimates a 70 per cent chance of such a season. Earlier this year, in May, NOAA put the likelihood of a below normal season at fifty per cent.

NOAA has revised its outlook on El Nino as well. The likelihood of El Nino during August-October has decreased to 55% (from 75% in May), and its likelihood during the fall and winter has decreased to about 65% (from near 80%).

Russia’s retaliatory sanctions include its decision to shut off natural gas supplies to Ukraine, heightening price risk next winter.  Disruptions could also affect demand for alternative fuels such as diesel fuel oil. The risk is even more severe because Ukraine is the transit route for half of Russian gas flowing into Western Europe. The rate of gas flowing into Ukraine from Russia has fallen around 84 per cent since mid-June.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending August 1, 2014 were released by the Energy Information Administration.

Total commercial stocks of petroleum fell for the second week in a row, losing 8.4 million barrels last week. Half of the decline was found in gasoline.  Supplies now stand at 1.120 billion barrels of oil.  Current supply lags last year by 1.3 million barrels.

Commercial crude oil stocks fell 1.8 million barrels to 365.6 million barrels during the report week. This continues a reduction that began in early May when crude oil stocks were at 397.6 million barrels. Stocks are five million barrels higher than they were at the start of 2014 and 2.3 million barrels higher than last year at this time.

The decline was found on the East Coast and the Gulf Coast.  Stocks at Cushing, OK were up 0.1 million barrels, moving to 18 million barrels.  The decline of stocks at Cushing is coming to an end as transportation enhancements have facilitated distribution of previously land-locked crude oil.

Crude oil imports fell 181,000 barrels daily during the report week, averaging 7.6 million barrels daily.  Imports are down 8.2 per cent from the same four-week period last year.

U.S. crude oil production grew slightly to 8.5 million barrels a day according to the latest report. Alaska realized a small 10,000 barrel-daily increase in output.

Refinery utilization rates continue to ease off, coming in at 92.4 percent. Regional utilization was higher on the East Coast.  And Midwest refineries could not sustain utilization at more than 100 per cent recorded two weeks ago.  Rates fell and are now down to 93.8 per cent.  Crude oil inputs to refineries fell to 16.4 million barrels per day.

Gasoline production recovered, adding 442,000 barrels per day.  This reflected a sharp increase in demand to 9.4 million barrels per day.  Demand continues to be very volatile this summer driving season.  The four-week average is just below 9 million barrels per day.  The report week’s level of demand is the highest reported in 2014 and reportedly the highest since June, 2011.

The jump in demand apparently fueled a decline in gasoline stocks of 4.4 million barrels to 213.8 million barrels.  The drop occurred in most regions. The East Coast (-1.6 million barrels) and the Midwest (1.3 million barrels) had particularly large declines.

Distillate fuel oil supplies fell 1.8 million barrels during the report week.  The declines were seen largely on the Gulf Coast (-2.1 million barrels).  Supplies in the U.S. have now fallen back below last year’s levels. It is especially worrisome as ULSD prices appear to be bottoming for the season. And exports continue to eat into domestic supplies, now being sent out at the rate of 1.2 million barrels daily.

Distillate fuel oil demand reached four million barrels daily.  Refinery production of distillate fuels fell to 4.8 million barrels per day.

Propane inventories added another 1.3 million barrels in the U.S. Total stocks are 68.5 million barrels.  Gulf Coast stocks are 37.4 million barrels, up one million barrels for the week. Midwest stocks were up 0.5 million barrels.  Inventories there are now 22.9 million barrels.

 

Natural Gas

According to the EIA: Net injections in storage declined for the fourth week in a row. The net injection reported for the week ending August 1 was 82 Bcf, 33 Bcf larger than the five-year average net injection of 49 Bcf and 8 Bcf smaller than last year’s net injection of 90 Bcf. Working gas inventories totaled 2,389 Bcf, 538 Bcf (18.4%) less than last year at this time and 608 Bcf (20.3%) below the five-year (2009-13) average.

Thirteen weeks remain until October 31 when the injection period traditionally ends.  EIA puts the five year average underground storage of natural gas at the end of October at 3.851 Tcf.  It requires weekly injections to average 112 Bcf to reach that level.

Availability of supply has increased, reflecting slight gains in supply and declining demand. Production of dry natural gas has been flat but is significantly higher than last year.  EIA puts the gain at 5.2 per cent over last year at this time.  Demand declines occurred in all major sectors because of continuing cool weather.  Power generation fell three per cent.

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. 32
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