Production Deal Supports Price
- Agreement deals with broad range of considerations
- Six-month term supports nearby prices
- U.S. producers also benefit from OPEC deal
- Natural gas tops $3.75
The Matrix
The OPEC-non-OPEC agreement has been received positively by global oil markets. It was responsive to the needs of the participants (and even some non-participants). Moreover, there was a degree of sophistication in its terms not generally recognized in press reports.
Crude oil futures rallied more than $7.00 when the OPEC-only agreement was announced, topping at $52.42. This level broke $52 resistance briefly. Crude oil prices traded slightly lower since then, markets consolidating after the fact.
A second meeting with non-OPEC producers, notably Russia, completes the package. Non-OPEC producers have agreed to cut 558,000 barrels per day. The agreement is notable in that it represents the largest non-OPEC contribution ever agreed. Oil prices broke through resistance and WTI sees resistance above $60.
Expectations for higher prices are bullish for all producers irrespective of whether they are signatories to the agreement. U.S. shale oil producers are especially benefited in view of their record of shrinking costs of production.
The rally in crude oil prices was felt more keenly in the nearby futures contract months; more distant months were less affected. And as prices rose, hedgers were able to lock in prices from June 2017 forward at prices over $54. Moreover, limiting the agreement to six months influences the front months, reducing interest in hedging more distant months.
All of OPEC’s maneuvering may be foiled by market action anyway. Higher prices, after all, require higher consumption. There is growing evidence that gasoline demand in the United States may now be starting to top.
This has been an unusual period of U.S. gasoline demand growth. One analysis reports growth of 2.2% in 2015 – 2016, reflecting economic growth and low cost fuel. The Energy Information Administration (EIA) is now estimating that gasoline demand growth will slow to 60,000 barrels per day in 2017. Prices have been rising for nearly a year, bottoming at $0.8975 in February. They have since risen by two-thirds, inevitably cutting into demand.
The current economic expansion could give way to recession, a common phenomenon with the advent of a new administration. In Powerhouse’s November 4, 2016, weekly Market Update, we noted, “The reality of a slower economy when national leadership changes is hard to refute.”
Supply/Demand Balances
Supply/demand data in the United States for the week ending December 2, 2016, were released by the EIA.
Total commercial stocks of petroleum increased 1.4 million barrels during the week ending December 2, 2016.
Increases were reported in stocks of gasoline, fuel ethanol, K-jet fuel, distillates and residual fuel oil. Draws were seen in stocks of propane and other oils.
Commercial crude oil supplies in the United States fell to 485.8 million barrels, a decrease of 2.4 million barrels.
Crude oil supplies decreased in three of the five PAD Districts. PAD District 3 (Gulf Coast) crude oil stocks fell 6.9 million barrels, PADD 4 (Rockies) crude stocks declined 0.4 million barrels, and PADD 5 (West Coast) stocks drew by 2.2 million barrels.
PAD District 1 (East Coast) crude oil stocks increased 0.2 million barrels and PADD 2 (Midwest) crude oil stocks grew 2.5 million barrels.
Cushing, Oklahoma, inventories increased 3.8 million barrels from the previous report week to 65.3 million barrels.
Domestic crude oil production decreased 2,000 barrels daily to 8.697 million barrels per day.
Crude oil imports averaged 8.303 million barrels per day, a daily increase of 755,000 barrels. Exports grew 25,000 barrels daily to 499,000 barrels per day.
Refineries used 90.4% of capacity, an increase of 0.6 percentage points from the previous report week.
Crude oil inputs to refineries increased 134,000 barrels daily. There were 16.417 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 110,000 barrels daily to 16.669 million barrels daily.
Total petroleum product inventories saw an increase of 3.8 million barrels from the previous report week.
Gasoline stocks added 3.4 million barrels. Total stocks are 229.5 million barrels.
Demand for gasoline decreased 323,000 barrels per day to 8.757 million barrels daily.
Total product demand decreased 656,000 barrels daily to 19.102 million barrels per day.
Distillate fuel oil supply increased 2.5 million barrels; total stocks are 156.7 million barrels. National distillate demand was reported at 3.704 million barrels per day during the report week. This was a weekly decrease of 137,000 barrels daily.
Propane stocks fell 1.5 million barrels to 99.3 million barrels. Current demand is estimated at 1.477 million barrels per day, an increase of 317,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working natural gas stocks post below-average net withdrawals. Net withdrawals from storage totaled 42 Bcf, compared with the five-year (2011 – 2015) average net withdrawal of 61 Bcf and last year’s net withdrawals of 69 Bcf during the same week. Working natural gas stocks total 3,953 Bcf, which is 254 Bcf more than the five-year average and 51 Bcf more than last year at this time.
Net withdrawals matched expectations, well below last year and the five-year average. Now, with weather likely to bring cold air over the Midwest, prices have moved higher, easily knifing through $3.75. Elliott Wave analysis points to $4.00 completing a five-wave rally.
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