Gasoline Crack Spreads Moving Higher
1. Gasoline crack spread, basis May, breaks right shoulder resistance
2. Iran calls production freeze agreement “laughable”
3. Saudi Arabia insists it can produce profitably at $20.00 per barrel
4. Gasoline recovers its position as growth transport fuel
The Matrix
Internal strains in OPEC are surfacing following the production freeze agreement put forward in recent days. Saudi Arabia, Russia and a few more producers have signed on, but resistance from Iran continues and is becoming more vocal. Statements from various oil ministers offered a very mixed picture of attitudes among producer nations.
Saudi Arabia seems to have retreated from its view that a production freeze for a few months could lead to actual cuts in output. The Saudi oil minister asserted that the Kingdom could “produce profitably at $20 per barrel.” The clear implication being that higher cost producers would need to be squeezed out of the market by low price. In particular, U.S. shale fields, Canadian oil sands and deep water projects started when prices were much higher were cited.
Iran, which initially made equivocal statements about the freeze, has now taken a more negative position. Its oil minister was derisive, calling the Saudi- Russia agreement “ridiculous” and “laughable.” Iran is increasing output now that sanctions have been lifted.
There has been a major shift in long term assumptions regarding gasoline. EIA’s Annual Energy Outlook for 2015 assumed a shift from motor gasoline to distillate for transportation. “The gasoline share of total demand for transportation petroleum and other liquids declines by 10.6 percentage points, while distillate consumption increases by 7.2 percentage points.”
The reality of lower gasoline prices has changed this calculus. Economic growth and lower prices led to a 2.6 per cent gain in gasoline consumption in 2015. The increase was one of the largest seen in the past forty years.
Source: Powerhouse
Gasoline crack spreads may be ready to rally. A strong December advance brought the May gas crack to $25.02. Subsequently, the crack lost value, trading at $16.25 as an intraday low on February 9, 2016. That low was part of a technical chart pattern, the “inverted head and shoulders,” often seen as a bottoming pattern. And, by breaking now over the right shoulder of that inverted h/s, the crack spread might be seen as ready to advance. Technical analysis suggests a target of $24.07.
There has also been a resurgence of interest in large vehicles. New buying has shifted the vehicle fleet toward larger crossover utility vehicles.
Fuel-efficient car purchases have declined.
Globally, middle distillate consumption had been expected to grow most rapidly among the products. In fact gasoline has taken the lead.
Slowdowns in freight demand and an El Nino winter ate deeply in to distillate demand.
Supply/Demand Balances
Supply/demand data in the United States for the week ending February 19, 2016 were released by the Energy Information Administration.
Total commercial stocks of petroleum increased 3.5 million net barrels during the week ending February 19, 2016.
A build was reported in stocks of K-jet fuel. Draws were reported in stocks of gasoline, fuel ethanol, distillates, residual fuel oil, propane, and other oils.
Crude oil supplies in the United States increased to 507.6 million barrels, a build of 3.5 million barrels.
Crude oil supplies increased in four of the five PAD Districts. PADD 1 (East Coast) crude oil stocks increased 0.5 million barrels, PADD 2 (Midwest) stocks grew 0.4 million barrels, PADD 3 (Gulf Coast) crude oil stocks expanded 4.4 million barrels, and PADD 4 (Rockies) stocks increased 0.6 million barrels. PADD 5 (West Coast) crude oil stocks decreased 2.5 million barrels.
Cushing, Oklahoma inventories were increased 0.4 million barrels to 65.1 million barrels.
Domestic crude oil production decreased 33,000 barrels daily to 9.102 million barrels per day.
Crude oil imports averaged 7.802 million barrels per day, a daily decrease of 117,000 barrels.
Refineries used 87.3 per cent of capacity, a decrease of 1.0 percentage points from the previous report week.
Crude oil inputs to refineries decreased 163,000 barrels daily; there were 15.685 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 185,000 barrels to 15,857 million barrels daily.
Total petroleum product inventories saw a decrease of 8.5 million barrels from the previous report week.
Gasoline stocks decreased 2.2 million barrels; total stocks are 256.5 million barrels. Demand for gasoline increased 372,000 barrels per day to 9.576 million barrels daily.
Total product demand increased 926,000 barrels daily to 20.668 million barrels per day.
Distillate fuel oil supply decreased 1.7 million barrels. National distillate demand was reported at 3.704 million barrels per day during the report week. This was a weekly increase of 222,000 barrels daily.
Propane stocks decreased 3.7 million barrels to 66.7 million barrels. Current demand is estimated at 1.546 million barrels per day, a decrease of 135,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working gas in storage was 2,584 Bcf as of Friday, February 19, 2016, according to EIA estimates. This represents a net decline of 117 Bcf from the previous week. Stocks were 615 Bcf higher than last year at this time and 577 Bcf above the five-year average of 2,007 Bcf. At 2,584 Bcf, total working gas is above the five-year historical range.
The implications of the United States becoming an exporter of natural gas have only now started to be evaluated. Falling prices for natural gas have already weakened the ability of Russia in particular to use its exports as a foreign policy tool.
U.S. companies have developed LNG export facilities where natural gas is cooled enough to be shipped on tankers to foreign ports. Inevitably, an international gas market will develop similar to the global trade already well established for crude oil.
One analyst said, “U.S. LNG cargoes, in combination with a bevy of new gas projects in Australia, will probably add 15 billion cubic feet of daily supply to global markets in the next few years. That would be a 43 percent addition to the 35 billion currently bought and sold internationally.” The United States is likely to replace Russia as the cheapest supplier.
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