Is A Bottom Forming in Brent Crude Oil?

  1. Technical price divergence showing in Brent crude oil
  2. Crude oil stocks show first decline in ten weeks
  3. OPEC production agreement fails to develop
  4. Natural gas has second week of withdrawals from storage

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse
 

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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 markets are reacting bearishly to the failure of oil producers to agree on cuts in crude oil output. This is impacting distillates in particular. Pressure has been very strong in Europe where cheap crude has allowed refiners to amp-up runs and new facilities in the Middle East have poured supplies into the OECD. Storage at ARA (Amsterdam-Rotterdam-Antwerp) is reportedly seventy per cent full and stocks of distillate in Germany are above their five year average.

The backwash of this oversupply has affected North America too. And a five million barrel increase in domestic supplies of ULSD reported for the week ending December 4, 2015 adds to the pressure.
The spot ULSD crack spread has seen significant erosion in recent weeks. Early in November, ULSD cracks reached $19.08. They have traded below $14.70—a reduction of more than twenty per cent. Distillate fuel oil imports have recently been rising and demand has moved counter-seasonally lower. Elliott Waves remain bearish. Indeed, wave counts offer potential price objectives of $1.07 and $0.70.

Elliott counts are in a fifth wave but there are few indications of a bottom. One early indication of a potential rally comes from action in Brent crude oil. The chart below shows the price of Brent since May of 2014. Below that line is one of its technical indicators, the Relative Strength Indicator (RSI.) The RSI measures the velocity and magnitude of price movements.

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Brent crude oil has made new lows throughout 2015, most recently settling just below $40. The RSI is charted just below it. While price has been falling, RSI is rising indicating a slowing of downward movement. Most importantly, it is diverging from price. And divergence can be an important early sign of directional change in price.

Early expectations of some sort of pan-producer output cut fell apart when reality set in at the OPEC meeting. Instead of a reduction in supply, did not address quotas in its final communique. This leaves quotas unchanged at 30 million barrels daily. Actual OPEC production which is running up to 32 million barrels daily.

The high level of OPEC production leaves little for the bulls to hope for, at least until the spring. U.S. production has resisted the downside, remaining around nine million barrels daily. Moreover, Iran should be exporting between one-half and one million barrels per day once sanctions are lifted at year end. There are reportedly 50 million barrels of crude in Iranian tankers waiting to be put on the market.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending December 4, 2015 were released by the Energy Information Administration.

Total commercial stocks of petroleum decreased 3.6 million net barrels during the week ending December 4, 2015.

Builds were reported in stocks of RBOB, distillates, and residual fuel oil. Draws were reported in stocks of fuel ethanol, K-jet fuel, propane and other oils.

Crude oil supplies in the United States decreased to 485.9 million barrels, a draw of 3.6 million barrels.

Crude oil supplies increased in three of the five PAD Districts. PADD 1 (East Coast) crude oil stocks grew 1.2 million barrels, PADD 2 (Midwest) stocks increased 0.6 million barrels, and PAD District 5 (West Coast) crude oil stocks grew 2.5 million barrels. PADD 3 (Gulf Coast) crude oil stocks experienced a draw of 7.3 million barrels and PADD 4 (Rockies) crude stocks declined 0.6 million barrels.

Cushing, Oklahoma inventories increased 0.4 million barrels to 59.4.

Domestic crude oil production decreased 38,000 barrels daily to 9.164 million barrels per day.

Crude oil imports averaged 8.021 million barrels per day, a daily increase of 274,000 barrels.

Refineries used 93.1 per cent of capacity, a decrease of 1.4 percentage points from the previous report week.

Crude oil inputs to refineries decreased 151,000 barrels daily; there were 16.652 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 205,000 barrels to 16.865 million barrels daily.

Total petroleum product inventories were unchanged from the previous report week. Gasoline stocks increased 0.8 million barrels; total stocks are 217.7 million barrels.

Total product demand increased 405,000 barrels daily to 20.270 million barrels per day.

Demand for gasoline increased 139,000 barrels per day to 9.420 million barrels daily.

Distillate fuel oil supply increased 5.0 million barrels. National demand was reported at 3.268 million barrels per day during the report week. This was a weekly decrease of 378,000 barrels daily.

Propane stocks decreased 3.4 million barrels to 100.7 million barrels. Current demand is estimated at 1.543 million barrels per day, an increase of 245,000 barrels daily from the previous report week.

 

Natural Gas

According to the EIA:

Working gas in storage was 3,880 Bcf as of Friday, December 4, 2015, according to EIA estimates. This represents a net decline of 76 Bcf from the previous week. Stocks were 514 Bcf higher than last year at this time and 236 Bcf above the five-year average of 3,644 Bcf. At 3,880 Bcf, total working gas is above the five-year historical range.

This was the second week of withdrawals from storage. It was larger than the markets anticipated, surprising in view of the continuing warm weather characteristic of this winter. EIA reported an average temperature in the lower 48 states of 43 degrees for the report week, three degrees warmer than normal.

Prices reflected soft demand. Cash Henry Hub prices dropped below $2 briefly, an important psychological level. Futures have found support at $2.00, but a break of that level introduces further downside to $1.95 and then $1.90.

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