Geopolitical Tensions are Heating Up. Will Petroleum Prices Follow?
- News of a downed passenger jet in Ukraine and Israeli ground troops in Gaza heightens global geopolitical tensions.
- Libyan crude oil production disappoints….again.
- Record crude inputs to refineries leads to a surprisingly large draw in crude oil stocks.
- Natural gas prices continue to fall on strong storage injections.
Sincerely,
Elaine Levin
President, Powerhouse
The Matrix
Charlie Brown runs for the ball. Lucy pulls it away right before he can kick it. It’s a gag used many times in the comic strip Peanuts. It could also characterize the return of Libyan oil to the world markets. Last week prices were falling on reports on the reopening of two import ports and the restart of production at one of the country’s largest fields. This week, the Wall Street Journal reports, “Oil production has been slashed at Libya’s el-Feel field….The worst violence in Tripoli in six months leads to fear of new disruptions.” Yet again, the promise of Libyan crude oil is pulled away. Aaugh!
Trading started this week with aggressive selling. Key support levels were tested: $99.00 for WTI, $2.85 for ULSD and $2.87 for RBOB futures. Crude oil support held with a tick to spare. Product prices had a difficult time settling under support, but finally gave way at the close on Friday.
A surprisingly large draw in crude oil inventories combined with bullish news out of Libya pushed crude oil prices back up quickly. A report of a Malaysian Jet downed by a Russian made air-defense missile immediately sent prices higher. This was followed by news of Israeli ground troops entering Gaza. Both news stories fueled buying of crude oil on Thursday. Brent and WTI futures scored their first weekly gain since the end of June. Stronger prices for crude combined with weaker product trading pushed crack spreads lower. The front month RBOB crack traded under $17.00, the lowest price since the switch to summer grade last February. ULSD cracks are down to $16.50, a price not seen since January 2011. This trend will ultimately bring an end to the record crude inputs to refineries reported this week.
Supply/Demand Balances
Supply/demand data in the United States for the week ending July 11, 2014 were released by the Energy Information Administration.
Total commercial stocks of petroleum continued to grow, adding 1.2 million barrels last week. Supplies now stand at 1.124 billion barrels of oil. Current supply is 2.4 million barrels more than last year.
Commercial crude oil stocks fell a surprising 7.5 million barrels during the report week. Declines were seen in all PADDs except for PADD 4, the Rocky Mountains. Stocks at Cushing, OK were down 700,000 barrels to 20.3 million barrels. Stocks at Cushing are half of what they were at the start of 2014, and the lowest point of the year so far. Gulf Cost stocks moved back under 200 million barrels.
Crude oil imports were slightly higher, averaging over 7.4 million barrels daily for the week. Imports are down 5.2% from the same four-week period last year. U.S. crude oil production continues to grow. U.S. is producing almost 8.6 million barrels a day according to the latest report.
Refinery utilization rates were up 2.2 percent, with refineries running at 93.8 percent, a level not seen since June 2006. Utilization was up everywhere except for the East Coast. Midwest refineries could not resist taking advantage of low cost crude oil. Midwest utilization was 100.3 percent of capacity, a number rarely seen. Refinery runs typically reach their zenith at this time of the year.
Crude oil inputs to refineries were a record setting 16.26 million barrels per day. Inputs of crude oil and other feedstocks also hit a record of 16.822 million barrels per day.
Gasoline production fell back below 10 million barrels per day. Demand moved back above 9.0 million barrels per day. Demand has been very volatile in the summer driving season so far. The 4 week average is just below 9 million barrels per day.
Gasoline stocks recorded another small build. Inventories moved up by 200,000 to 215 million barrels. Current inventory levels are equivalent to the 5 year average level. Supply on the East Coast reversed the gains from last week, losing 1.4 million barrels of inventories.
Distillate fuel oil supplies added 2.5 million barrels during the report week. Most of the increase was in PADD 1. Supplies in the U.S. continue to lag last year’s levels by more than 2 million barrels. The builds are welcome, as distillate stocks continue to hug the lows of the five year range of inventories. Distillate fuel oil demand was down to 3.7 million barrels daily. Refinery production of distillate fuels was just shy of 5.2 million barrels per day.
Propane inventories added another 3.2 million barrels in the U.S. Stocks are approaching the upper limit of the 5 year range. Midwest stocks were up 1.3 million barrels. Inventories there are now above 20 million barrels.
Natural Gas
Triple digit injections were back in force for the week ending July 11th. Natural gas production is rising. Production is up 5% over last year, even with declining rig counts. Cooler air from a “polar vortex” like event will keep cooling demand low. No wonder natural gas futures prices have fallen to a seven month low. Last week we suggested that support would be tested at $3.95. This level was breached soon after this week’s storage report was issued. We remain bearish. $3.55-$3.50 is the next area of support.
Inventories continue to build. According to EIA. Working gas in storage was 2,129 Bcf as of Friday, July 11, 2014, according to EIA estimates. This represents a net increase of 107 Bcf from the previous week. Stocks were 608 Bcf less than last year at this time and 727 Bcf below the 5-year average of 2,856 Bcf. In the East Region, stocks were 338 Bcf below the 5-year average following net injections of 65 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. 29
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