Oil Trading without Direction
- WTI crude oil trading in $11.50 range since August 2016
- WTI price curve moving toward backwardation
- Fundamentals mixed; more crude oil production, less inventory
- Natural gas injections exceed five-year average
The Matrix
Oil prices on futures markets are either trending or trading. Trending markets are characterized by rising (falling) peaks and troughs. It’s been a while since crude oil futures prices have trended. Markets that do not trend are called trading markets, in which prices trace out a range of prices with no discernable direction.
A year ago, West Texas Intermediate (WTI) crude oil traded around $43. Since then, prices have traded in tight ranges, topping out around $54.50 at the end of 2016. Prices spent three months at that level before moving lower, but still well within the range (WTI is now trading around $48.00).
However, there has been one factor that might be an indicator for future pricing. WTI prices were in carry a year ago—then-current prices were lower than more distant prices. Since then, the differences have narrowed. One interpretation of this is that traders are pricing nearby WTI with more relative value. This could then mean that supply is becoming dearer.
This is especially interesting because fundamental data are presenting a very mixed picture. U.S. crude oil production exceeded 9.5 million barrels daily in the most recent Energy Information Administration (EIA) report. This is not yet a record (reached in July 2015 at 9.6 million barrels per day), but is advancing at a rapid rate. EIA is projecting an 800,000-barrel-daily gain in 2017 production and another 1 million barrels per day next year.
This bearish factor for pricing is offset by bullish exports and tightening stocks. This year to date, crude oil exports have been running 768,000 barrels daily. The comparable period last year saw exports of 467,000 barrels per day, an increase of 64.3%.
U.S. oil stocks continue to shrink under the pressure of strong demand and exports, despite refinery activity at 96% of capacity. Total stock of crude oil and products fell 7 million barrels during the week ending August 11, 2017. Supply has fallen 56 million barrels since its recent high at 1.360 billion barrels in February.
Supply/Demand Balances
Supply/demand data in the United States for the week ending August 11, 2017, were released by the EIA.
Total commercial stocks of petroleum decreased 7.3 million barrels during the week ending August 11, 2017.
Builds were reported in stocks of fuel ethanol, distillates, propane and other oils. Draws were reported in stocks of K-jet fuel and residual fuel. Gasoline stocks were unchanged from the previous report week.
Commercial crude oil supplies in the United States decreased to 466.5 million barrels, a draw of 8.9 million barrels.
Crude oil supplies decreased in two of the five PAD Districts. PADD 3 (Gulf Coast) crude oil stocks declined 7.2 million barrels and PADD 5 (West Coast) crude stocks retreated 2.5 million barrels. PAD District 1 (East Coast) crude oil stocks rose 0.2 million barrels, PADD 2 (Midwest) stocks increased 0.1 million barrels and PADD 4 (Rockies) crude oil stocks advanced 0.4 million barrels.
Cushing, Oklahoma, inventories increased 0.6 million barrels from the previous report week at to 57.0 million barrels.
Domestic crude oil production increased 79,000 barrels daily to 9.502 million barrels per day from the previous report week.
Crude oil imports averaged 8.126 million barrels per day, a daily increase of 364,000 barrels. Exports rose 170,000 barrels daily to 877,000 barrels per day.
Refineries used 96.1% of capacity, a decrease of 0.2 percentage points from the previous report week.
Crude oil inputs to refineries decreased 9,000 barrels daily. There were 17.565 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 19,000 barrels daily to 17.840 million barrels daily.
Total petroleum product inventories saw an increase of 1.6 million barrels from the previous report week.
Gasoline stocks were unchanged from the previous report week; total stocks are 231.1 million barrels.
Demand for gasoline fell 275,000 barrels per day to 9.522 million barrels daily.
Total product demand decreased 971,000 barrels daily to 20.959 million barrels per day.
Distillate fuel oil supply rose 0.7 million barrels to 148.4 million barrels. National distillate demand was reported at 4.222 million barrels per day during the report week. This was a weekly decrease of 288,000 barrels daily.
Propane stocks rose 1.6 million barrels from the previous report week to 69.2 million barrels. Current demand is estimated at 1.004 million barrels per day, a decrease of 303,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Weekly net injections top five-year average. Net injections into storage totaled 53 Bcf for the week ending August 11, compared with the five-year (2012 – 2016) average net injection of 50 Bcf and last year’s net injections of 23 Bcf during the same week.
So far in the 2017 refill season, net injections into working gas storage are lower than the five-year average in most regions of the Lower 48 states. Net injections into working gas have been at 1,031 Bcf since March 31, 2017—the traditional beginning of the refill season—compared with the five-year average of 1,241 Bcf over the same period.
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.
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