Gasoline Supplies Impacted by Natural Gas Stringency
- Natural gas plays an important role in crude oil processing
- Gasoline imports fell in last DOE report
- High natural gas prices could eat into overseas gasoline production
- U.S. natural gas supply near 5-year minimum.
Alan Levine, Chairman
The Energy Market Situation for this week of August 1 explores the intersection between natural gas and petroleum products. In particular, we note generally tight domestic supplies, and the expansion of LNG exports from the United States despite the unresolved liquefaction issues at Freeport, Louisiana.
This could, ironically, have important implications for gasoline availability in the United States and overseas. The importance of natural gas in refinery operations is not often discussed in the general press, but an unusually low level of gasoline imports in the DOE Supply/Demand Balance for the week ended July 22 has raised concerns over global gasoline availability in the months ahead.
The Report recorded a drop in imports to just under 600,000 daily barrels of gasoline for that week. The source countries of the reduced imports are not known. European refiners, however, have reportedly not been able to maintain runs because of very high power and natural gas costs.
Overseas natural gas markets have been selling at prices often five to eight times those in the United States. Most recently, European natural gas has sold at about $350/bbl equivalent for middle distillate.
An analysis from a respected refinery consultant noted that natural gas affects refinery operations in three ways. It is used to create heating and vaporizing streams for crude oil production, the cat cracker and the coking units. About 60% of the refinery’s gas needs is made internally, about 40% is purchased.
Refineries have large electric needs. Their prices are usually tied to natural gas, which has skyrocketed in Europe. Finally, hydrogen (from natural gas) is used to remove sulfur, and plants running sour crude slates require more of it.
All of this can put European facilities at a significant cost disadvantage. There are, of course, alternative operating possibilities like naphtha, and other NGLs, but each has its own cost configurations to consider.
The possibilities of lower runs under these conditions cannot be ignored. If the import data for the week ended July 22 are any more than a statistical quirk, the impact on gasoline availability could be severe. And gasoline demand in the United States reached 9.2 million barrels in the same Report, not materially lower than the strongest demand and higher that year-to-date demand as well. Current stocks are nine million barrels lower than last year at this time.
Supply/demand data in the United States for the week ended July 22, 2022, were released by the Energy Information Administration.
Total commercial stocks of petroleum fell 3.3 million barrels during the week ended July 22, 2022.
Commercial crude oil supplies in the United States decreased by 4.5 million barrels from the previous report week to 422.1 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Down 0.7 million barrels to 7.5 million barrels
PADD 2: Down 1.0 million barrels to 104.3 million barrels
PADD 3: Down 2.4 million barrels to 239.3 million barrels
PADD 4: Plus 0.2 million barrels to 23.6 million barrels
PADD 5: Down 0.6 million barrels to 47.4 million barrels
Cushing, Oklahoma, inventories were up 0.7 million barrels from the previous report week to 23.5 million barrels.
Domestic crude oil production was up 200,000 barrels from the previous report week to 12.1 million barrels daily.
Crude oil imports averaged 6.164 million barrels per day, a daily decrease of 355,000 barrels. Exports increased 789,000 barrels daily to 4.548 million barrels per day.
Refineries used 92.2% of capacity; 1.5 percentage points lower than the previous report week.
Crude oil inputs to refineries decreased 292,000 barrels daily; there were 16.027 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 272,000 barrels daily to 16.540 million barrels daily.
Total petroleum product inventories rose by 1.2 million barrels from the previous report week, rising to 783.3 million barrels.
Total product demand decreased 1.049 million barrels daily to 19.976 million barrels per day.
Gasoline stocks decreased 3.3 million barrels from the previous report week; total stocks are 225.1 million barrels.
Demand for gasoline rose 724,000 barrels per day to 9.245 million barrels per day.
Distillate fuel oil stocks decreased 0.8 million barrels from the previous report week; distillate stocks are at 111.7 million barrels. EIA reported national distillate demand at 3.750 million barrels per day during the report week, an increase of 53,000 barrels daily.
Propane stocks were up 2.6 million barrels from the previous report week to 61.8 million barrels. The report estimated current demand at 627,000 barrels per day, a decrease of 505,000 barrels daily from the previous report week.
June’s mishap at the Freeport Louisiana LNG export facility negatively impacted first-half 2022 LNG exports. Nonetheless, outflows of LNG from the United States in the first half of 2022 leaped higher, growing 12% over the prior six months. LNG exports averaged 11.2 Bcf/d. (June exports averaged 11% less LNG than the previous five months. EIA expects at least partial restoration of liquefaction in early October, 2022.)
The chart of natural gas in underground storage (below) shows current storage hugging the five-year minimum. Tight supply was reflected in the price rally seen in July’s Henry Hub natural gas futures. Prices bottomed on July 5 at $5.325. They moved higher through the month, with few setbacks, topping at $9.752 on July 26, a gain of more than 83%.
At its high, natural gas formed a “shooting star” candlestick. This pattern often indicates a top, and that seems to be the situation here. The July 26 candle presented with a very long upper wick and a small body near the daily low. Traders took prices higher during the day and pushed them back toward the low before the close. Moreover, price activity on the next few days appears to confirm the top, as values have moved even lower. July 31 closed at $8.23. Price support can be found at the 50% retracement of $7.54 and $7.00, the Fibonacci 61.8% retracement.
Market activity in the energy sector casts a doubt on how low natural gas prices will actually go. Overseas demand and ongoing concerns about winter supply in the European Union could induce further buying, hiking prices and turning the Henry Hub price higher again. A recovery to the recent highs could open the way to roughly $10.50 and then towards $11.25.
According to the EIA:
Working [natural] gas in storage was 2,416 Bcf as of Friday, July 22, 2022, according to EIA estimates. This represents a net increase of 15 Bcf from the previous week. Stocks were 293 Bcf less than last year at this time and 345 Bcf below the five-year average of 2,761 Bcf. At 2,416 Bcf, total working gas is within the five-year historical range.
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