Petroleum Complex Continues its Price Slide
This week’s Energy Market Situation highlights:
- Downward price pressure on petroleum futures continues..
- IEA expects an acceleration in global oil demand next year.
- Unseasonably cold weather is expected for the Midwest and North East.
- Natural gas prices break trading range support
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
Downward price pressure continued during the week ending July 11th for crude oil and petroleum product futures. Prices extended the decline that began on June 23rd. RBOB futures lost $0.23 from the June high. ULSD futures were down $0.12 over the same timeframe. The bears had plenty of motivation. Fighting in Iraq did not spread into the producing regions of the south or Kurdistan. Libyan key export terminals were reopened. Libya’s largest oil field, Sharara, reportedly ramped up production much faster than expected. New pipelines are expected to open in the third quarter that will bring supply back into Cushing, OK.
ULSD futures moved into the lower end of the trading range that has been in place since 2011. $2.85 support was tested and held. $2.80 is key support. Buyers, especially for next winter, were taking advantage of the decline. Despite a fast return to the low end of the range, option volatility remains low. Buyers should consider purchasing protective puts against long winter barrels.
Markets ignored a bullish report from the IEA predicting that next year global oil demand will rise at the fastest pace in five years. The Paris-based agency believes world oil consumption will increase next year by 1.4 million barrels per day, higher than the 1.2 million barrel increase in production from non-OPEC supply.
Supply/Demand Balances
Supply/demand data in the United States for the week ending July 4, 2014 were released by the Energy Information Administration.
Total commercial stocks of oil increased 4.6 million barrels. Supplies now stand at 1.123 billion barrels of oil. This is the highest commercial stock level of the year so far. Current supply is 1 million barrels more than last year.
Commercial crude oil stocks fell 2.3 million barrels during the report week. There are 3.83 million barrels of crude oil in the system. Gulf Coast storage decreased 4.2 million barrels, bringing the regional total to 200.6 million barrels.
Stocks rebounded at Cushing, OK. 400,000 barrels were added to storage at Cushing, which now holds 20.9 million barrels of inventory.
Crude oil imports were mostly unchanged at 7.3 million barrels daily for the week. U.S. crude oil production continues to grow. The U.S. produced over 8 million barrels daily during the report week. This is over a million barrels higher than year-ago levels.
Refinery utilization rates continued to increase, with refineries running at 91.6 percent. The Gulf Coast added another 1.5 percentage points, reaching 94.5 percent of capacity
Crude oil inputs to refineries were steady at 16.2 million barrels per day. This may represent a high point, as runs tend to reach their peak in mid-July.
Gasoline production continues to exceed ten million barrels daily. Demand fell back below 9.0 million barrels per day, a loss of 233,000 barrels per day. A bump in demand leading into the 4th of July holiday did not materialize. As noted last week, demand has been very volatile in the past eight weeks but has not broken out of its recent range.
Gasoline stocks increased 600,000 barrels during the report week. Supply on the East Coast reversed the declines from last week, adding 1.3 million barrels to inventories. RBOB inventories on the East Coast have been improving, and are only marginally behind year-ago levels Supplies elsewhere were marginally lower.
Distillate fuel oil supplies added 300,000 barrels during the report week. Both coasts recorded declines offset by increases in the center of the country.
Supplies in the U.S. lag last year’s levels by 2 million barrels. Distillate stocks continue to hug the lows of the five year range of inventories. Distillate fuel oil demand was stronger, just shy of 4.0 million barrels daily. Refinery production of distillate fuels moved back over 5 million barrels a day, a number not seen for the past month.
Propane inventories added another 3.9 million barrels in the U.S. This continues the trend of impressive gains. Propane stocks have moved above the last year’s levels and above the 5 year average for this time. Propane demand fell to 733,000 barrels per day.
Natural Gas
Has sizzling summer been replaced by shivering summer? Washington, D.C recorded record low temperatures after the fireworks on July 4th, with temperatures falling into the 50’s in many parts of the area. Forecasters are warning of a “Polar Vortex”…..in July! While weather purists may say it is not technically polar vortex, unseasonably chilly air is headed for northern central and eastern parts of the country this week. The 6-10 day temperature outlook issued last week by NOAA’s Climate Prediction Center looks more like a report from January 9, not July 9.
This is bearish for prices. Natural gas futures prices broke $4.20 support. This support was at the bottom of a $0.70 trading range in place since March of this year. Next support will be at $3.95.
Inventories continue to build. According to EIA: Working gas in storage was 2,022 Bcf as of Friday, July 4, 2014, according to EIA estimates. This represents a net increase of 93 Bcf from the previous week. Stocks were 653 Bcf less than last year at this time and 769 Bcf below the 5-year average of 2,791 Bcf.
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. 28
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