Additional Crude Oil Coming To Market
- Iraq will be producing an additional 550 thousand barrels per day of crude oil from Kurdistan.
- EIA reduced forecast for 2015 US production.
- Permits for new wells fell sharply in November.
- Natural gas withdrawal about half of expectations.
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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
Oil prices continued to soften. WTI moved solidly below $70. There has been no hint of a countervailing rally since the week ending October 3rd. The overwhelming market attitude is bearish.
WTI Open Interest is increasing as prices fall.
OPEC exceeded its official production target for a sixth straight month despite a loss of output in November. The organization pumped 30.56 million barrels daily in November.
Iraq will be bringing new oil onto the market under a deal done between Baghdad and its Kurdish region. The arrangement calls for 550,000 barrels per day of oil from Kurdistan to be sold, dividing the proceeds between the National government and Kurdistan. The oil will include 300,000 barrels daily from Kirkuk, now controlled by the Kurds. The new supply could put further bearish pressure on prices, especially in light of an estimate that the current global oversupply of crude oil is about 1.8 million barrels daily.
There are a few potentially bullish factors developing for price. The EIA has reduced its 2015 U.S. production forecast to 9.4 million barrels daily. This is an adjustment of 100,000 barrels daily.
New well permits fell almost 40 per cent in November according to the firm Drilling Info Inc. Permits provide a picture of what drill rigs will be doing over the next 60- 90 days. Well permits fell from 7,227 in October to 4,520 in November. Steep declines were shown across three major fields, the Permian Basin and Eagle Ford in Texas and the Bakken shale in North Dakota.
There have been press reports that Saudi Arabia, one of the world’s largest oil and gas producers, might consider reducing production if other countries from outside the Organization for the Petroleum Exporting Countries followed suit.
Notwithstanding these bullish hints, the bear market continues. WTI is trading at $66.36, with minor support at $58.35. Distillate fuel oil shows support at $1.98 and RBOB is supported at $1.62.
Time to Review the Gas Crack
- Fundamentals matter – the dramatic drop in gasoline price has spurred demand to summer levels. Last week demand reached 9.54 million barrels per day nationally and the 4-week average came in at 9.22 million barrels per day, the most since July 2011.
- Refineries continue to exit the fall maintenance period, runs now up to 93.4% of capacity.
- The spread between Brent crude and WTI is now $2.94/bbl (Brent more expensive than WTI). It reached a high watermark in November ’13 at nearly $17/bbl.
If gasoline demand remains above average when refiners start to enter the spring maintenance window, then wholesale gasoline prices could be pushed higher. Remember, markets are always evaluating the ‘next’ event.
Crack spreads can increase in value under a number of different scenarios. Even if crude prices continue to fall, as long as the gasoline price falls less, the crack spread will increase.
As the Brent-WTI spread increases, gasoline cracks spreads tend to move higher in concert. Given that we appear to be near a cyclical low on the Brent-WTI spread, this suggests a bullish potential for the gas cracks.
Charts are included at the end of this e-mail showing the anticipated schedule of refinery maintenance for 2015 and the May gas crack contract.
Supply/Demand Balances
Supply/demand data in the United States for the week ending November 28, 2014 were released by the Energy Information Administration.
Total commercial stocks of petroleum fell 1.1 million net barrels during the week. Increases focused on gasoline and distillate fuel oils while declines were experienced for crude oil, other oils and residual fuel oil.
Crude oil supplies fell 3.7 million barrels to 379.6 million barrels in the United States.
Stocks fell in most Districts. The West Coast (1.7 million barrels) the Midwest (0.4 million barrels) and the Gulf Coast (1.5million barrels) lost inventories. The East Coast alone showed a build.
Cushing, Oklahoma inventories declined to 23.9 million barrels according to this week’s report. This was a drop of 0.4 million barrels for the report week.
There was no change in domestic crude oil production during the report week. Production remains over nine million barrels daily. Crude oil imports fell during the week, moving down 170,000 barrels daily to 7.3 million barrels daily.
Crude oil inputs to refineries rose almost 400,000 barrels per day; there were 16.4 million barrels per day of crude oil run to facilities. Most of the gain occurred on the Gulf Coast. West Coast facilities experienced a small slowdown in refining activity.
Refinery utilization grew to 93.4 per cent. Utilization has risen steadily since October 1 when only 86.7 per cent of capacity was in use. The Gulf Coast saw the most intense usage, operating at 95.8 per cent. Refineries in the Midwest and in the Rockies are also running around 95 per cent.
Total petroleum inventories netted gains of 5.6 million barrels against declines of 6.9 million barrels. Gasoline added 2.1 million barrels to supply. Gains were seen in every region east of the Rockies. Both the East Coast and Gulf Coast increased stocks by 700,000 barrels each.
Demand for gasoline rose to 9.4 million barrels daily. This is unusual for this time of year. It undoubtedly reflects recent declines in pump prices and may also be the result of heavy Thanksgiving driving.
Distillate fuel oil stocks added three million barrels to inventory. There are 115.2 million barrels now available. Stocks continue to hug the lower end of the five year range.
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Midwest distillate fuel oil supplies are at 23.7 million barrels, adding 1.8 million barrels to stock. National demand fell to 3.6 million barrels per day during the report week.
Propane stocks added 200,000 barrels. There are 79.4 million barrels in storage. Current demand is estimated at 1.2 million barrels per day.
Natural Gas
According to EIA: Net withdrawal is significantly lower than the five-year average and last year’s withdrawal. The net withdrawal reported for the week ending November 28 was 22 Bcf, 28 Bcf lower than the five-year average net withdrawal of 50 Bcf and 119 Bcf lower than last year’s net withdrawal of 141 Bcf. Working gas inventories as of November 28 totaled 3,410 Bcf, 227 Bcf (6.2%) lower than last year at this time and 372 Bcf (9.8%) lower than the five-year (2009-13) average.
The withdrawal of 22 Bcf was about half of market expectations. The West and Producing regions actually showed injecitons. Much of it can be traced to unusually mild weather in recent weeks. The Climate Prediction Center of NOAA produces heating degree day data for the United States. CPC reported that, for the week ending November 29th, every region of the country fell well short of last year’s HDDs. Overall, the United States developed 54 fewer HDDs than last year at this time.
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At writing, natural gas prices are pressing lower, about to challenge support at $3.54. A break of that level opens the way to $3.16.
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