HO Breaks Support; EIA: NG Below $4 ‘Til 2050

  1. ULSD breaks $1.64, looking for $1.55
  2. HDDs fall short again
  3. Wuhan coronavirus still spreading globally
  4. EIA: NG consumption to fall in 2020s.

Al pic 2009_cropped

Alan Levine, Chairman of Powerhouse
 
 

The Matrix

Bearish factors have moved distillate fuel oil prices into levels not seen since the end of 2018. ULSD was then trading at $1.7018, reflecting a substantial supply of ULSD.

The supply situation at the start of 2020, was similar, but prices were lower. ULSD stocks in the United States were at 145 million barrels in the week ending January 24, 2020, about 3.5 million barrels more than last year at this time. Futures prices for ULSD have broken support at $1.6425. ULSD’s next major support is at $1.5485.

(An interesting aside. Powerhouse has long noted that HO prices generally reach their low during the first quarter. That was the case in 2019—a buyer of winter HO would have bought the best price for the year. Prices in 2020 could repeat that first-quarter low.)

Lower prices for ULSD in 2020 reflect several factors now moving markets. Adequate supply is certainly one of them. And failing Heating Degree Days have eaten into demand for ULSD as well. The country generated 80 fewer HDDs than last year during the week ending February 1, 2020. The population rich Middle Atlantic states fell behind last year by 105 weekly HDDs.

What’s different this year is a new strain of coronavirus. The Chinese government is taking very extensive steps to contain a potential global infection from a virus first identified in Wuhan, a city in central China. The numbers keep changing, but press reports are impressive. More than 50 million people are on lockdown in the region. The virus has led to more than 300 deaths in the area. The government has sidelined transportation facilities, including trains, buses and aircraft. There have been major impacts on international travel.

Some analysts estimate a decline in petroleum demand could reach 1 million barrels daily at least for the first part of the year. Concerns and anxiety are growing, especially because the scope of the problem is unclear as yet. Lower prices could continue to be the story until some assurance of reversal, or at least containment leads the news.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending Jan. 24, 2020, were released by the Energy Information Administration.

Total commercial stocks of petroleum rose by 1.0 million barrels during the week ending Jan. 24, 2020.

Commercial crude oil supplies in the United States increased by 3.5 million barrels from the previous report week to 431.7 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Plus 0.2 million barrels to 10.5 million barrels
PADD 2: Down 0.1 million barrels to 125.8 million barrels
PADD 3: Plus 2.4 million barrels to 221.6 million barrels
PADD 4: Plus 0.4 million barrels to 21.9 million barrels
PADD 5: Plus 0.8 million barrels to 51.9 million barrels

Cushing, Oklahoma inventories up 0.7 million barrels from the previous report week to 35.6 million barrels.

Domestic crude oil production was unchanged from the previous report week at 13.0 million barrels daily.

Crude oil imports averaged 6.660 million barrels per day, a daily increase of 229,000 barrels. Exports rose 95,000 barrels daily to 3.509 million barrels per day.

Refineries used 87.2 percent of capacity, down 3.2% from the previous report week.

Crude oil inputs to refineries decreased 933,000 barrels daily; there were 15.924 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 612,000 barrels daily to reach 16.409 million barrels daily.

Total petroleum product inventories fell 2.5 million barrels from the previous report week.

Gasoline stocks increased 1.2 million barrels daily from the previous report week; total stocks are 261.2 million barrels.

Demand for gasoline rose 131,000 barrels per day to 8.793 million barrels per day.

Total product demand decreased 1.865 million barrels daily to 19.638 million barrels per day.

Distillate fuel oil stocks decreased 1.3 million barrels from the previous report week; distillate stocks are at 144.7 million barrels. EIA reported national distillate demand at 3.901 million barrels per day during the report week, a decrease of 488,000 barrels daily.

Propane stocks decreased 3.6 million barrels from the previous report week; propane stocks are 82.9 million barrels. The report estimated current demand at 1.377 million barrels per day, an increase of 2,000 barrels daily from the previous report week.

 

Natural Gas

The Energy Information Administration advises that “natural gas prices will remain below $4 per million Btus through 2050.” The Reference case of EIA’s Annual Energy Outlook points to record production and ample storage as underlying reasons for this bearish forecast.

Natural gas consumption in the United States should slow after 2020 and remain flat through 2030 due to “slower industrial sector growth and declines in the power sector… U.S. exports could rise to about 27.0 bcfd by 2030 and remain near there through 2050. The exports by 2050 include about 15.9 bcfd of liquefied natural gas (LNG), 8.2 bcfd of pipeline exports to Mexico and 3.4 bcfd of pipeline exports to Canada.”

EIA’s forecast contemplates a very long time horizon, during which a lot can happen. More immediately, natural gas has traded an extremely tight range around $1.82– $1.92 since January 21, 2020. The current range follows a steady erosion of price since November 2019, when prices topped $2.90. Contrarian traders should now be considering whether bearish sentiment has saturated the market. If so, an opening for the bulls may soon be on us.

According to EIA:

The net withdrawal from storage totaled 201 Bcf for the week ending January 24, compared with the five-year (2015–19) average net withdrawal of 143 Bcf and last year’s net withdrawal of 171 Bcf during the same week. Working natural gas stocks totaled 2,746 Bcf, which is 193 Bcf more than the five-year average and 524 Bcf more than last year at this time.

The average rate of withdrawal from storage is 14% lower than the five-year average so far in the withdrawal season (November through March). If the rate of withdrawal from storage matched the five-year average of 12.8 Bcf/d for the remainder of the withdrawal season, the total inventory would be 1,890 Bcf on March 31, which is 193 Bcf higher than the five-year average of 1,697 Bcf for that time of year.

 

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