Growing Uncertainty in the Energy Outlook
- Price direction confused by contradictory administration statements
- “Border Tax” could raise prices
- OPEC claims “substantial” compliance
- Natural gas export margins grow
Sincerely,
Alan Levine, Chairman of Powerhouse
The Matrix
The reality of a Trump administration has shaken expectations of traditional regulatory behavior in the energy sector. A series of administrative orders or even nothing more than comments from his staff have thrown a twist into the future of several energy rules. These include uncertainty on the future of the Renewable Fuel Standard (RFS), renewing the path for the Keystone Pipeline and implementation of a “Border Tax Adjustment,” among other changes in the energy regulatory framework. We emphasize that expectations are not reality and there is a long way to go before a revised landscape actually takes shape.
Nonetheless, some market analysts have opined on the potential impact of some changes. The “Border Tax Adjustment” would likely be the most significant policy change. It could raise the price of domestic crude oil, perhaps moving West Texas Intermediate (WTI) above the price of Brent crude oil by $6 – $9. Reflecting the higher crude price, product prices would likely rise too, possibly by 20 cents per gallon. The markets could also see higher refined product exports, pulled up by the terms of the Border Tax. There could also be bearish impacts from a higher U.S. dollar and higher U.S. domestic product prices.
The OPEC-non-OPEC group of producers claim that all participants are in substantial compliance. They state that 1.5 million barrels of a planned 1.8-million-barrel production cut has been implemented. Saudi Arabia reports output now below 10 million barrels daily and has undertaken to initiate further cuts in February. Russia claims a reduction of supply of 100,000 barrels per day, twice its original plan.
OPEC-non-OPEC professes little concern for expanding rig counts in the United States. Higher demand, in its view, will absorb growth in U.S. production. The new U.S. administration’s Border Tax ideas tend toward higher prices with bearish implications for demand.
The mix of bullish and bearish data held futures markets at bay. Futures prices ended daily trading little changed following release of the Energy Information Administration (EIA) numbers. Overall, these data support a view of domestic oil markets adequately supplied. There are nearly 29 days of gasoline supply in the system and 48 days of distillate fuel oil available as well.
Supply/Demand Balances
Supply/demand data in the United States for the week ending January 20, 2017, were released by the EIA.
Total commercial stocks of petroleum increased 8.9 million barrels during the week ending January 20, 2017.
Builds were reported in stocks of gasoline, fuel ethanol, K-jet fuel, distillates, residual fuel oil and other oils. There was a draw in stocks of propane.
Commercial crude oil supplies in the United States grew to 488.3 million barrels, an increase of 2.8 million barrels.
Crude oil supplies increased in three of the five PAD Districts. PADD 1 (East Coast) crude oil stocks expanded 3.5 million barrels, PADD 3 (Gulf Coast) stocks increased 1.1 million barrels and PADD 5 (West Coast) stocks grew 0.3 million barrels. PAD District 2 (Midwest) crude oil stocks fell 1.4 million barrels and PADD 4 (Rockies) stock decreased 0.6 million barrels.
Cushing, Oklahoma, inventories decreased 0.3 million barrels from the previous report week to 65.4 million barrels.
Domestic crude oil production increased 17,000 barrels daily to 8.961 million barrels per day.
Crude oil imports averaged 7.810 million barrels per day, a daily decrease of 568,000 million barrels. Exports fell 105,000 barrels daily to 599,000 barrels per day.
Refineries used 88.3% of capacity, a decrease of 2.4 percentage points from the previous report week.
Crude oil inputs to refineries decreased 421,000 barrels daily. There were 16.047 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 436,000 barrels daily to 16.312 million barrels daily.
Total petroleum product inventories saw an increase of 6.1 million barrels from the previous report week.
Gasoline stocks expanded 6.8 million barrels; total stocks are 253.2 million barrels.
Demand for gasoline decreased 30,000 barrels per day to 8.039 million barrels daily.
Total product demand decreased 2.063 barrels daily to 18.639 million barrels per day.
Distillate fuel oil supply increased 0.1 million barrels; total stocks are 169.1 million barrels. National distillate demand was reported at 3.645 million barrels per day during the report week. This was a weekly decrease of 450,000 barrels daily.
Propane stocks fell 4.0 million barrels to 68.2 million barrels. Current demand is estimated at 1.384 million barrels per day, a decrease of 531,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Warmer-than-normal weather leads to relatively modest net withdrawal. Net withdrawals from storage totaled 119 Bcf, compared with the five-year (2012 – 2016) average net withdrawal of 176 Bcf and last year’s net withdrawals of 202 Bcf during the same week. Warmer-than-normal temperatures throughout most of the Lower 48 states mitigated heating demand for gas and contributed to the below-average withdrawals from storage. Working gas stocks total 2,798 Bcf, which is 20 Bcf less than the five-year average and 348 Bcf less than last year at this time.
Despite the significantly smaller-than-normal withdrawals this storage week, withdrawals from storage are ahead of the average pace so far for the 2016 – 2017 heating season compared with previous years. Working gas levels declined 1,236 Bcf from November 8, 2016 (a seasonal peak), to January 20, 2017. This total net withdrawal is the second largest over the comparable period since 2010—the beginning of EIA’s five-region weekly working gas history. The five-year average pull over this period is 1,058 Bcf.
The implications of changing energy policy should impact natural gas expectations as well. Prices could move higher, reflecting the policy’s tilt toward protection of domestic industry. Exports could be positively affected as well. Apart from policy effects, liquified natural gas (LNG) margins on exports to Asia and Europe have expanded with margins on cargoes to Asia over $6.00 per mmBtu.
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