Inventory Gains Don’t Translate Into Lower Prices
- Recovery to $90-plus crude oil price seems unlikely
- US energy independence strains geopolitical relationships
- Crude oil supplies added 7.3 million barrels during the week ending December 19
- Heating degree days lag last year for recent week
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
Saudi Arabia has revealed its willingness to allow the oil price to slide. This marks a major shift in the geopolitical order that had been in place for decades. Heretofore, the Saudis had controlled production in order to support price. They were concerned that production from non-OPEC crude oil producers like Russia and Mexico could damage the Kingdom’s revenues and political standing.
The elephant in the room, of course, is the United States. Burgeoning crude oil supplied from shale deposits posed a particular threat to Saudi Arabia because the U.S. was an important customer for Saudi oil. On a broader stage, shale oil added to global stocks, already in surplus.
To complicate the pricing situation even more, it was unlikely that other OPEC producers as well as Non-OPEC Russia would be willing to join in a coordinated output cut. Moreover, a unilateral Saudi cut would only invite a loss in market share.
Observers are now wondering how badly the Saudis may have misjudged the situation. After months during which analysts projected a rapid return to $90-plus prices, it now appears that lower prices may be in the cards for some time to come.
The use of oil as a political weapon may be shifting too. The U.S. pressured Iran by working with the Saudis, the UAE and Kuwait to assure buyers of Iranian oil that alternative supplies were available if the Iranian embargo was observed. American energy independence has strained these relationships. Similar strains have developed around Venezuela.
Supply/Demand Balances
Supply/demand data in the United States for the week ending December 19, 2014 were released by the Energy Information Administration.
Total commercial stocks of petroleum rose 6.4 million net barrels during the week. The largest increase was in crude oil, followed closely by gasoline and then distillate fuel oil. Relatively small draws were reported for ethanol, residual fuel oil and propane. Stocks of other oils fell 5.9 million barrels.
Crude oil supplies in the United States rose 7.3 million barrels to 387.2 million barrels. A week with unusually high imports and continuing domestic production is bringing stocks toward all-time highs recorded earlier this year in May at 397.6 million barrels.
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Stocks of crude oil rose dramatically in all PAD Districts except the West Coast where inventories lost 0.7 million barrels. Gulf Coast storage added 5.2 million barrels during the report week. The Midwest showed a gain of 1.3 million barrels and facilities on the East Coast added 1.7 million.
Cushing, Oklahoma inventories rose to 28.8 million barrels according to this week’s report. This was an increase of 1.0 million barrels for the report week. Stocks at Cushing have been growing since October 3rd when they bottomed at 18.9 million barrels.
Earlier this year, Cushing stocks fell as new pipes brought stocks to the Gulf. Now, new facilities are directing crude oil to Cushing. These include the Pony Express pipe line carrying Bakken south. Another incoming line is Flanagan South, running from Pontiac, Illinois.
Domestic crude oil production fell slightly to 9.127 million barrels daily. Crude oil imports rose sharply during the week, moving up 1.2 million barrels daily to 8.3 million barrels per day. This was reportedly the highest level in over a year. Nonetheless, the trend in imports is down and the report week’s level should be seen as an outlier.
Crude oil inputs to refineries were largely unchanged; there were 16.3 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks were unchanged as well.
Refinery utilization was unchanged at 93.5 per cent. Facilities on the East Coast had the largest relative change, adding 2.6 percentage points to usage during the report week.
Total petroleum product inventories netted gains of 6.4 million barrels against declines of 7.2 million barrels. Gasoline added 4.1 million barrels to supply. Gains were seen in every PAD District except the Rockies. The East Coast (+4.1million barrels) and Midwest (+3.4 million barrels) had the largest gains.
Demand for gasoline rose 145,000 barrels per day to 9.5 million barrels daily. Low price supports demand and the data were reportedly the highest ever for the pre-Holiday week. Supporting that demand, refinery production reached 9.9 million barrels daily.
Click chart to enlarge.
Distillate fuel oil stocks added to inventory. Stocks were 123.8 million barrels up 2.3 million barrels. National demand rose to 4.3 million barrels per day during the report week, notwithstanding mild weather. During the week ending December 20, 2014, the Climate Prediction Center recorded 24 fewer Heating Degree Days than last year at this time.
Propane stocks fell 500,000 barrels. There are 77.8 million barrels in storage. Current demand is estimated at 1.3 million barrels per day.
Natural Gas
According to EIA: Working gas in storage was 3,246 Bcf as of Friday, December 19, 2014, according to EIA estimates. This represents a net decline of 49 Bcf from the previous week. Stocks were 150 Bcf higher than last year at this time and 169 Bcf below the 5-year average of 3,415 Bcf.
The release of the EIA’s inventory caused a further sell-off on the futures markets. Prices reached $3.00, round number support. This price had not been seen since the week ending September 28, 2012. Major support was found at $2.575 in August of that year. This level was established as natural gas prices recovered from a low of $1.927 in April 2012.
The impact of below-normal heating degree days has been felt in the northern half of the United States as can be seen on the table below:
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