Petroleum Prices Look for Direction

  1. Petroleum prices move sideways
  2. Global demand worries continue to cap prices
  3. ULSD crack spreads approaching seasonal lows
  4. Natural gas futures hit a three year low

Al pic 2009_cropped

Alan Levine Chairman of Powerhouse
 
 
 

The Matrix

Crude oil and petroleum product trading has been quiet, with no clear sense of direction. WTI opened the week at $56.22. Friday’s settlement price was $56.16, a move of only six ticks. Prices are stuck in the tug of war between ongoing geopolitical tensions in the Strait of Hormuz and signs of a slowdown in global growth.  The S&P stock index made new highs as the European Central Bank signaled future rate cuts, and in anticipation of a widely expected interest rate cut by the Federal Reserve next week. Will that be enough to reinvigorate economies that are showing signs of stalling?

The Purchasing Managers Index (PMI) is used to measure future economic activity as viewed by supply chain managers, and those managers are feeling less enthusiastic as the trade dispute with China grinds on. The U.S. PMI was released last week at 50, the lowest since September 2009. The Eurozone’s PMI is at its lowest since 2012.  An announcement of face to face talks between the U.S. and China was not enough to spark enthusiasm from oil bulls, reflecting skepticism that a deal will be done soon.

Prices have been consolidating for some time now. Typically the longer the consolidation pattern, the more dramatic the exit from the trading pattern. Petroleum prices will not stay quiet forever. The good news is with lower volatility comes lower option premiums. This is an opportunity for hedgers who have not yet covered their price exposure.

Summer is the busiest driving season of the year. Refineries are also at their most active, maximizing production to meet the increased demand for gasoline. A refinery cannot make gasoline without making diesel. Growing diesel supply at this time puts pressure on refining profit margins. The lowest crack spread for diesel typically occurs at this time of year. Late July is usually the seasonal window for those looking to hedge retail diesel margins.

Fall refinery turn-around is right around the corner. This year it is forecasted to be unusually large as global refiners get their last chance at maintenance before the marine fuel specification change in January (IMO2020.)  As crude runs slow during the fall months, demand for diesel increases. On-road diesel demand tends to peak in October as goods are moved ahead of the holiday season. Fall harvest and the push to get construction work done before the winter add to demand. The result – wholesale diesel prices typically rise during the fall.

The ULSD crack can be used as a hedge to protect retail margins. The below graph shows the seasonal tendency of the ULSD crack spread. Hedgers are buying the late 2019 cracks (long ULSD, short crude) now to protect against a potential squeeze in diesel margin later this year.

Avg Weekly Heat Crack Prices 2008 – Jul 2018 source: CME, POWERHOUSE

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending July 11, 2019, were released by the Energy Information Administration.

Total commercial stocks of petroleum rose 11.7 million barrels during the week ending July 19, 2019.

There were builds in stocks of fuel ethanol, K-jet fuel, distillates, residual fuel, and propane. There were draw in stocks of gasoline and other oils.

Commercial crude oil supplies in the United States fell 10.8 million barrels from the previous report week to 445.0 million barrels.
Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks declined 2.2 million barrels, PADD 2 (Midwest) stocks fell 1.0 million barrels, PADD 3 (Gulf Coast) crude stocks retreated 7.9 million barrels, and PADD 4 (Rockies) stocks decreased 1.2 million barrels. PADD 5 (West Coast) stocks grew 1.4 million barrels.

Cushing, Oklahoma inventories fell 0.4 million barrels from the previous report week to 50.4 million barrels.

Domestic crude oil production declined 700,000 barrels per day from the previous report week to 11.3 million barrels daily.

Crude oil imports averaged 7.028 million barrels per day, a daily increase of 196,000 barrels. Exports rose 758,000 barrels daily to 3.292 million barrels per day.

Refineries used 93.1 percent of capacity, down 1.3% from the previous report week.

Crude oil inputs to refineries decreased 233,000 barrels daily; there were 17.034 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 233,000 barrels daily to 17.508 million barrels daily.

Total petroleum product inventories rose 4.1 million barrels from the previous report week.

Gasoline stocks decreased 0.2 million barrels daily from the previous report week; total stocks are 232.5 million barrels.

Demand for gasoline rose 459,000 barrels per day to 9.673 million barrels per day.

Total product demand increased 1.277 million barrels daily to 21.583 million barrels per day.

Distillate fuel oil stocks increased 0.6 million barrels from the previous report week; distillate stocks are at 136.8 million barrels. EIA reported national distillate demand at 4.264 million barrels per day during the report week, an increase of 699,000 barrels daily.

Propane stocks increased 1.6 million barrels from the previous report week; propane stocks are 79.1 million barrels. The report estimated current demand at 832,000 barrels per day, a decrease of 466,000 barrels daily from the previous report week.

 

Natural Gas

Natural gas futures traded $2.169 per MMBtu on Friday, a three year low. This despite power plants burning record amounts of natural gas during last week’s heat wave. One would have to go back 20 years to 1999 to find as low a July natural gas price. If prices break under $2.00, next support for natural gas is $1.909, the low from May 2016. Major support comes in at $1.611, which was last witnessed in March 2016.

According to the Energy Information Administration:

Working gas in storage was 2,569 Bcf as of Friday, July 19, 2019, according to EIA estimates. This represents a net increase of 36 Bcf from the previous week. Stocks were 300 Bcf higher than last year at this time and 151 Bcf below the five-year average of 2,720 Bcf. At 2,569 Bcf, total working gas is within the five-year historical range.

 

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.

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