Market Sell-off Takes a Break

  • The current sell-off is based on more supply produced more efficiently
  • Technical Analysis suggests a target in the low ’40’s
  • Large increase in Midwest stocks
  • Natural gas stocks now exceed last year’s level

 

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse
 
power1

 Click table to enlarge.

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

The rush to the bottom that has characterized December petroleum pricing appears to have eased. Spot futures prices for WTI crude oil established support at $54 during the week. Similar support was found for distillate fuel oil at $1.93. RBOB fell to $1.51 on Tuesday, December 16th and subsequently made slightly higher intraday lows, but nothing approaching a change in trend.

The market’s focus is starting to shift to the longer view in light of the fact that this reduction in oil prices is different than earlier price collapses in 1986, 1999, and 2008. The declines in 1986 to $9.75 and in 1999 to $10.25 reflected the exertion of pricing power by OPEC, weak demand and development of non-OPEC supplies. The drop to $33.20 ending in January 2009 was occasioned by the virtual collapse of the international financial system.

What’s different this time? The emergence of the United States as a major producer of crude oil, new more efficient technologies and improvements in U.S. oil distribution capabilities. All of these have effectively made oil cheaper and more accessible.

Foreign contributions to supply may be expected from Kurdistan and southern Iraq. In addition, the Russian ruble’s collapse has had the effect of lowering costs while the oil is sold in dollars.

Oil prices have not yet given an indication that a bottom is in place. Chart patterns are not showing a change; oil prices have a tendency to move rapidly out of lows. This has not happened here.

Elliott Wave analysis suggests a downward impulse wave may be complete, but even a consolidation should lead only to further weakness in the weeks ahead as winter runs its course. A rally to the mid $60’s could be followed by a move into the $40’s.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending December 12, 2014 were released by the Energy Information Administration.

Total commercial stocks of petroleum rose 5.4 million net barrels during the week. The largest increase was in gasoline. A smaller increase was seen in kero-jet. Declines were experienced for crude oil, distillate fuel oil and propane.

Crude oil supplies in the United States fell 0.8 million barrels to 379.9 million barrels.

Stocks of crude oil rose dramatically in the Midwest but fell in every other PAD District. The Midwest showed a gain of 5.5 million barrels. The gain came despite little change in regional refining and reduced imports. Declines were reported for the West Coast (-3.8 million barrels,) the Gulf Coast (-0.6 million barrels) and the East Coast (0.9 million barrels.)

Cushing, Oklahoma inventories rose to 27.8 million barrels according to this week’s report. This was an increase of 2.9 million barrels for the report week. This level was last seen in April as Cushing was being drained by new distributional capabilities. Stocks at Cushing have been growing since October 3rd when they bottomed at 18.9 million barrels. The growth accentuates the potential for further bearish accumulations of crude oil supply.

Domestic crude oil production pushed higher during the report week. Production reached 9.137 million barrels daily. This is a new high for output; production has now exceeded highs last seen in 1986. Crude oil imports fell during the week, moving down 564,000 barrels daily to 7.1 million barrels per day.

Crude oil inputs to refineries fell 326,000 barrels per day; there were 16.3 million barrels per day of crude oil run to facilities. The losses were seen in every PADD except in the Rockies where inputs rose 40,000 barrels per day.

Refinery utilization fell to 93.5 per cent. This was the first set back in refinery use since October 17th. Utilization rose steadily since October 1 when only 86.7 per cent of capacity was in use. The Midwest saw the most intense usage, reflecting cheap feedstock. Refineries in the Rockies ran around 96.3 per cent of capacity – a 5.1 percentage point increase during the report week.

Total petroleum inventories netted gains of 5.4 million barrels against declines of 4.2 million barrels. Gasoline added 5.3 million barrels to supply. Gains were seen in every PAD District. The East Coast (+1.3 million barrels) and Midwest (+2.1 million barrels) had the largest gains.

Demand for gasoline rose 824,000 barrels per day to 9.4 million barrels daily. This is probably an adjustment to the smaller demand numbers reported by EIA in the prior week.

Distillate fuel oil stocks lost inventory. Stocks were 121.5 million barrels down 200,000 barrels. National demand rose to 4.2 million barrels per day during the report week, contributing to the loss in supply.

Propane stocks fell 800,000 barrels. There are 78.4 million barrels in storage. Current demand is estimated at 1.4 million barrels per day.

 

Natural Gas

According to EIA: The net withdrawal reported for the week ending December 12 was 64 Bcf, 93 Bcf lower than the five-year average net withdrawal of 157 Bcf and 192 Bcf lower than last year’s net withdrawal of 256 Bcf. Working gas inventories as of December 12 totaled 3,295 Bcf, 6 Bcf (0.2%) higher than last year at this time and 258 Bcf (7.3%) lower than the five-year (2009-13) average.

This was the first time this year that working gas inventories this year exceeded last year’s values. Accordingly, spot futures natural gas has broken support at $3.54.