Weekly Energy Market Situation: Jan. 28, 2014

Cold weather has emphasized challenges in the distribution of fuels, particularly in propane and natural gas.

Natural gas demand has bitten so deeply into storage that concerns are being raised as to the industry’s ability to fully recover storage by the start of the 2014-2015 withdrawal season.

Refinery utilization fell sharply during the week ending January 17th. Runs to still lost more than 500,000 barrels daily.

Natural gas prices have moved over $5 per MMbtu. As recently as last August, prices were at $3.

Sincerely,
Alan Levine
Chairman, Powerhouse

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

It takes stress to identify weaknesses in systems. The situation in energy supply over the past few weeks has done precisely that. Shortcomings in the distribution of energy have become headline news in recent days.

Propane availability, in particular, has faced stress. Wholesale rack posting have been suspended mostly in the Midwest and on the East Coast along the Dixie, MAPL, TEPPCO, ONEOK and other pipelines. The BTU equivalent prices of propane and crude oil are rapidly converging.

Technical analysis of propane price charts does not yet show any sign of faltering. Although late in the season, Elliott Wave puts propane in a final rally, with possible targets of $1.50 and even $1.80 basis Mt. Belvieu.

Natural gas and electricity have also experienced supply strains. Natural gas prices topped $5 last week. This was by no means a record, but prices have moved from $3 as recently as last August.

The magnitude of the rally could mean that the cold weather’s effect on the nation’s gas supplies will be more enduring. Natural gas, after all, is highly sensitive to temperature shifts. And it is possible that storage will not be fully replenished by next winter. In turn this has bullish implications for electricity prices as well.

US Supply/Demand Balances

The Energy Information Administration’s weekly report on US Petroleum Balances was released for the week ending January 17, 2014.

Perhaps the most interesting statistic in the EIA report was a sharp drop in refinery utilization. Runs to stills fell more than 500,000 barrels daily. The decline was felt most keenly on the Gulf Coast where runs dropped nearly 250,000 barrels per day and in the Midwest where runs fell 186,000 barrels daily.

Inventories of crude oil and products fell 4 million barrels during the week.

Crude oil stocks added one million barrels, and products lost five million barrels of stock. The largest declines were in distillate fuel oil (-3.2 million barrels) and propane (-3.4 million barrels).

Total product demand increased by about 100,000 barrels daily. Principal products: gasoline, distillate fuel oil and propane were largely unchanged for the week. Gasoline demand may continue to be limited by winter weather over the next week or so.

Adverse weather also affected crude oil production. Output remained only slightly over 8 million barrels per day.

Meanwhile the pressure to allow exports of crude oil from the United States is building. The US exports only a small amount of crude oil to Canada. The International Energy Agency, however, has questioned how much longer expanded US production could be accommodated in domestic markets. EIA believes that the “wall” limiting absorption of US crude oil could be overcome by changing the Jones Act according to press reports.

The US Energy Information Administration suggests easing the export question by means of direct crude oil swaps with Mexico. Another approach could be third-party crude oil processing arrangements with other countries.

Concerns for energy security and the attraction of cheaper US crude oil for American refiners, however, seem now to have the upper hand. Moreover, 2014 is an election year. Congress is unlikely to agree to a change in policy that might be seen as raising the price of gasoline.

Natural Gas

According to the EIA:

Working gas in storage was 2,423 Bcf as of Friday, January 17, 2014, according to EIA estimates. This represents a net decline of 107 Bcf from the previous week. Stocks were 598 Bcf less than last year at this time and 369 Bcf below the 5-year average of 2,792 Bcf.

Natural gas has faced interruption and OFOs, reflecting high demand in response to high heating degree days. The United States has accumulated 2,272 HDDs since July 1, 2013 as of January 18, 2014, 209 HDDs more than last year. The Mid-Atlantic States have developed 305 more HDDs than last year.

February natural gas futures have reached $5 at time of writing. Weather-related strength remains in force. This meets an Elliott Wave objective established as long ago as December 20, 2013. Our most recent iteration of the Elliott Wave count offers a new objective around $5.60.

One analysis of the natural gas storage situation suggests that storage might fall under 1.2 Tcf by the end of the withdrawal season in March. This means that 2.5 Tcf additional supplies would be needed to return stocks to their level in October 2013.

Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.Vol. PH 03 NO. 04