Weekly Energy Market Situation March 03, 2014

This week’s Energy Market Situation deals with the economic background and current overseas situation affecting energy prices.

1. Oil prices ended February on a soft note.

2. Oil prices began March with a strong rally responding to military action by Russia in the Crimea.

3. Other foreign activities roiling markets are occurring in Venezuela and Nigeria.

4. The economy has apparently slowed as the year begins, although how much of that is weather related is not clear.

5. Petroleum stocks appear to be bottoming as February ends.

6. Natural gas supplies are still declining, but the rate of fall is slowing.

Sincerely,
Alan Levine
Chairman, Powerhouse

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

Energy futures prices softened during the final week of February. In particular, RBOB futures lost around 8.3 cents during the week. The March contract specifies the final winter gasoline grade. It is not uncommon for prices on this contract to behave bearishly since conversion of winter grade to spring spec is difficult to accomplish.

Overseas activity focuses on problems created with Russia’s current involvement in the Ukraine. Aggression in the Crimea is nothing new. Its strategic location on the northern coast of the Black Sea has made it a target of conquerors including the Goths, the Huns, the Mongols of the Golden Horde, the Soviet Union and now Russia.

The most recent action is now roiling oil markets and, at writing, WTI crude oil is trading $104.31, $1.72 higher than Friday’s close. Russia is a major supplier of petroleum to Europe and the world’s largest producer of crude oil. It also supplies thirty per cent of Europe’s natural gas. The Ukraine is the main avenue through which natural gas flows west.

There have been no reports of interruption and we are at the end of winter. This should reduce the impact of current Russian activity but the problem remains. Financial markets have reacted to the possibility of sanctions being imposed and this has already affected the value of the ruble. Uncertainty breeds higher prices and this is now occurring.

There are other bullish developments in Venezuela and Nigeria. Caracas is experiencing internal unrest, reacting against inflation, crime and shortages of goods. The government struggles to pay its oil service bills disrupting production.

Its natural alternative is Nigeria which should benefit from Venezuela’s troubles but Nigeria faces its own challenges. An extraordinary amount of oil revenues is missing. Reportedly around $20 billion have not been transmitted to the government and petroleum savings diminished last year to almost nothing

The U.S. economy expanded at a slower pace than initially estimated in late 2013, a sign of moderating growth amid bad weather and softer overseas demand for American products. Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 2.4% in the final quarter of the year the Commerce Department said Friday, down from an initial expectation of 3.2%.

The economy appears to be reverting to its post-recession path, with overall growth remaining stubbornly close to 2%. Meanwhile, other recent gauges of consumer spending, job creation, factory output and the housing market all have flashed warnings signs.

Supply/Demand Balances

The Energy Information Administration’s weekly report on US Petroleum Balances was released for the week ending February 21, 2014.

Inventories of crude oil and products decreased 0.5 million barrels during the week.

Crude oil added only 100,000 barrels to storage. Storage in the Midwest fell 0.3 million barrels, reflecting the continuing drain at Cushing OK where an additional 1.1 million barrels were taken from stocks. Cushing stocks have fallen by a third since the beginning of the year. These supplies have become available for Gulf coast refiners and have supported the rally in WTI prices. This has also depressed the gasoline crack spread.

Gulf Coast refiners added 1.6 million barrels to stock. Refinery utilization on the Gulf Coast rose to 88.3 per cent, although crude runs remained unchanged.

Imports of crude oil fell 384,000 million barrels daily to 7.0 million barrels per day.

Domestic production remained over 8.0 million barrels daily.

Distillate stocks increased 0.3 million barrels during the report week. Total inventories on the East Coast remained unchanged. Distillate demand came in at 3.6 million barrels daily.

Gasoline demand added 500,000 barrels daily, now at 8.5 million barrels daily for the report week. Stocks fell 2.8 million barrels to 230.6 million barrels. The increase in demand comes at a time when we would expect that weather imposed unusual limits on usage.

Propane stocks were unchanged, standing at 37.1 million barrels during the report week.

Stocks of propane/propylene are below the average low of the past five years as shown in the chart from the Powerhouse suite of charts found at http://powerhousetl.com/eia-data-propane/. Like other oil inventories, levels are bottoming in seasonal fashion at this time.

Demand reportedly fell 138,000 barrels daily to 1.2 million barrels per day.

Natural Gas

According to the EIA:

Warmer weather brings a smaller-than-average net withdrawal. The net withdrawal reported for the week ending February 21 was 95 Bcf, 30 Bcf smaller than the 5-year average of 125 Bcf and 70 Bcf smaller than last year’s net withdrawal of 165 Bcf. Working gas inventories totaled 1,348 Bcf, 905 Bcf (40.2%) less than last year at this time, 711 Bcf (34.5%) below the 5-year (2009-13) average, and 446 Bcf (24.9%) below the 5-year minimum.

Supply is flat on rising production and falling imports. Overall natural gas supply remained essentially flat, increasing by 0.1% over last week. Natural gas dry production rose for the second consecutive week, increasing by 1.0 Bcf/d (1.5%). Dry gas production is currently above year-ago levels by 2.7 Bcf/d (4.3%).

Analysts have expressed concern that it might be hard to restore underground storage to 3.6Tcf by the end of October when the injection season ends. Another view of this challenge is that heating demand will be down thru summer as will be growth in electric load growth. Some believe that currently higher prices will induce switching from natural gas to coal. And new pipeline infrastructure will allow new supply to reach market. In this view, natural gas will be back in balance by October.

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