Weather Comes Up Short

  1. Heating degree days lag normal
  2. ULSD prices show support
  3. U.S. shale oil production could slow rally
  4. Natural Gas prices move lower

The Matrix

This has been a warmer winter measured by heating degree days (HDDs) collected by the Climate Prediction Center of the National Oceanic and Atmospheric Administration (NOAA.) HDDs accumulated from July 1, 2020, through January 16, 2021, reached 1,919 in the United States. Regionally, HDDs in New England and the Mid-Atlantic states came to about 2,480.

National HDDs failed normal by 295 HDDs. HDDs lagged normal by 461 HDDs in the Northeast. (Normal represents the average HDDs seen in the past thirty years. Each degree that a day’s average temperature is below 65° F represents one (1) heating degree day.)

The impact on ULSD pricing, however, reflects more than temperatures. Prices have moved inexorably higher, the rally waiting to catch its breath. The low ULSD futures price, $1.0252, came on November 2, 2020.

Spot ULSD futures reached $1.6235 around January 14, 2021. Since then, prices have been essentially flat. Prices settled at $1.5760 as the week of January 22 ended.

Those seeking the next trend in diesel prices face unusual challenges. The market has not had a serious correction since the November low. In addition to regular winter rallies, ULSD futures prices remain closely bunched. Every futures month from February to June, 2021 has a handle of $1.57.

Bullish factors are making their presence known. The availability of a viable COVID-19 vaccine has opened expectations of business recovery, despite start-up challenges.

Supply factors are falling into place too. OPEC+ has adopted a more business-like approach to crude oil production decisions. The cartel recognizes the fragility of its agreement and seeks to balance production in support of global economic growth. Notably, Saudi Arabia has indicated its willingness to cut production as needed.

The possibility of recovering shale oil output in the United States remains a concern for OPEC+ as U.S. shale producers get their DUCs in a row. DUCs are the inventory of drilled but uncompleted (DUC) wells. They provide a short-term reserve for the completion of new wells.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ended January 15, 2021 were released by the Energy Information Administration.

Total commercial stocks of petroleum fell by 0.7 million barrels during the week ended January 15, 2021.

Commercial crude oil supplies in the United States increased by 4.4 million barrels from the previous report week to 486.6 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Plus 1.4 million barrels to 11.6. million barrels
PADD 2: Down 4.4 million barrels to 139.7 million barrels
PADD 3: Plus 5.5 million barrels to 263.0 million barrels
PADD 4: Down 0.1 million barrels to 24.2 million barrels
PADD 5: Plus 1.8 million barrels to 46.2 million barrels

Cushing, Oklahoma inventories were down 4.7 million barrels from the previous report week to 52.5 million barrels.

Domestic crude oil production was unchanged from the previous report week at 11.0 million barrels daily.
Crude oil imports averaged 6.045 million barrels per day, a daily decrease of 194,000 barrels. Exports decreased 760,000 barrels daily to 2.251 million barrels per day.

Refineries used 82.5% of capacity, up 0.5% from the previous report week.

Crude oil inputs to refineries increased 110,000 barrels daily; there were 14.760 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 103,000 barrels daily to 15.174 million barrels daily.

Total petroleum product inventories fell 5.1 million barrels from the previous report week.

Gasoline stocks decreased 0.3 million barrels daily from the previous report week; total stocks are 245.2 million barrels.

Demand for gasoline rose 579,000 barrels per day to 8.112 million barrels per day.

Total product demand increased 35,000 barrels daily to 19.642 million barrels per day.

Distillate fuel oil stocks increased 0.5 barrels from the previous report week; distillate stocks are at 163.7 million barrels. EIA reported national distillate demand at 3.821 million barrels per day during the report week, an increase of 212,000 barrels daily.

Propane stocks decreased 6.2 million barrels from the previous report week; propane stocks are 59.8 million barrels. The report estimated current demand at 1.879 million barrels per day, an decrease of 225,000 barrels daily from the previous report week.

 

Natural Gas

The impact of fewer HDDs can be seen on the natural gas futures chart. Prices have bounced lower over the winter season as the prospective for natural gas use diminished through the season.

The most recent rally began on January 12, 2021. Prices reached $2.90 before moving lower. Since then, values fell to 2.47, breaking nearby support. Next support is found around $2.38.

According to the EIA:

The net withdrawals from [natural gas] storage totaled 187 Bcf for the week ending January 15, compared with the five-year (2016–2021) average net withdrawals of 167 Bcf and last year’s net withdrawals of 97 Bcf during the same week. Working natural gas stocks totaled 3,009 Bcf, which is 198 Bcf more than the five-year average and 36 Bcf more than last year at this time.

The average rate of withdrawals from storage is the same as the five-year average so far in the withdrawal season (November through March). If the rate of withdrawals from storage matched the five-year average of 13.4 Bcf/d for the remainder of the withdrawal season, the total inventory would be 2,004 Bcf on March 31, which is 198 Bcf higher than the five-year average of 1,806 Bcf for that time of year.

 

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