Quiet Markets Are a Precursor to Instability
This Week:
- Quiet markets are a precursor to instability
- The US economy contracted at a 1 per cent rate during the first quarter
- US crude oil production reached 8.5 million barrels daily
- Distillate fuel oil demand reached 4.2 million barrels daily during the week ending May 23rd.
- Natural gas storage grew 114 Bcf, the largest weekly addition since 2009.
Chairman, Powerhouse
The Matrix
Quiet markets continue to be the order of the day. Powerhouse’s comments last week on complacency among traders have been noted by other observers as well. We believe this boredom will eventually resolve with renewed volatility.
Why should stability be a precursor to instability? A recent article in the Washington Post referred to the economist, Hyman Minsky who explained, “Financial stability is destabilizing. The longer markets are calm, the more people plan on them staying that way. People take bigger risks and take on bigger debt because it doesn’t seem like anything can go wrong — until it does, and all this leverage turns small losses into big ones due to forced selling from margin calls.”
In another development, the U.S. economy contracted at a 1% seasonally adjusted annual pace in the first three months of the year, according to the Commerce Department. This is only the second time since the recession that output declined during a quarter. Economists do not believe that the U.S. is in a new recession because of the contraction. Many attribute the decline to weather-related interference with economic activity in the first quarter.
Supply/Demand Balances
Supply/demand data for the week ending May 23, 2014 were released by the Energy Information Administration.
Total commercial stocks of oil rose 3.2 million barrels. Commercial crude oil supplies added 1.7 million barrels during the report week. Gulf Coast storage added 3.1 million barrels of crude oil, bringing the total to 213.1 million barrels. Part of the increase offset another decline at Cushing, OK where 500,000 barrels were lost.
The Strategic Petroleum Reserve held 691 million barrels during the report week, unchanged from the prior week.
Crude oil imports recovered from the sharp reduction of the prior week, moving up 1.3 million barrels daily to 7.8 million barrels daily for the week. Weekly import data are notoriously variable. Nonetheless, the trend is pointing down. The average crude oil imports over the four weeks ending May 23rd a reduction from last year at this time of 9.3 per cent.
U.S. crude oil production reached 8.5 million barrels daily during the report week. The nine million barrels daily level is now in sight.
U.S. Crude Oil Production
Refinery utilization rates rose 1.2 percentage points from the prior week’s 88.7 per cent of capacity. Gulf Coast facilities operated at 89.9 per cent of capacity, adding 1.6 percentage points over the prior week.
Refiners ran crude oil at 15.851 million barrels per day, a weekly reduction of only 100,000 barrels daily. This is very near the historical maximum refinery output. Operable capacity has been put at 17.9 million barrels daily.
Gasoline production continues to exceed ten million barrels daily. Demand for the report week is at 9.3 million barrels daily. Using a four week average, demand is running 5.4 per cent higher than last year at this time. Exports of gasoline took another 386,000 barrels daily out of the system during the report week.
Gasoline stocks fell 1.8 million barrels during the week. Inventories on the East Coast accounted for a gain of 2.4 million barrels. The decline was seen in the Midwest (-2.0 million barrels) and on the Gulf Coast (-1.5 million barrels per day.)
Distillate fuel oil supplies fell only 0.2 million barrels during the report week to 116.1 million barrels. Supplies in the U.S. lag last year’s levels by 4.6 million barrels. Supplies of distillate fuel oil have remained below the lower level of the past five years. Distillate fuel oil demand was 4.2 million barrels daily, unusually high for this time of year.
Propane inventories added 2.2 million barrels in the U.S. for the second week in a row. PADD II stocks had a gain of 1.3 million barrels. Gulf Coast supplies grew 0.7 million barrels. Propane demand was put at 1.0 million barrels per day.
Natural Gas
According to the EIA: The net storage increase in natural gas stocks was the largest since 2009. The net injection reported for the week ending May 23 was 114 Bcf, 21 Bcf larger than the 5-year average net injection of 93 Bcf and 26 Bcf larger than last year’s net injection of 88 Bcf. Working gas inventories totaled 1,380 Bcf, 748 Bcf (35.2%) less than last year at this time, 922 Bcf (40.1%) below the 5-year (2009-13) average, and 680 Bcf (33.0%) below the 5-year observed minimum.
There are currently 23 more weeks in the injection season, which traditionally occurs April 1 through October 31, although in many years injections continue into November. In order to reach the EIA’s forecasted end-of-October working natural gas inventory level of 3,405 Bcf, an average injection of 88 Bcf per week will need to occur through the end of October. EIA’s forecast for the end-of-October inventory levels are below the 5-year (2009-13) minimum value of 3,793 Bcf. To reach the 5-year minimum, average weekly injections through the end of October would need to be 105 Bcf.
Tight price ranges continue to be the order of the day. Technical indicators are turning bearish, consistent with the seasonal pattern. Natural gas prices tend to bottom in July and August before the autumn rally gets underway.
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. 22
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