Prospect of Crude Oil Containment Problem Grows
- There are now 29 days of crude oil in storage—largest since 1986
- Countervailing foreign instability may be supporting price
- Cushing OK stocks at 51.5 million barrels—not quite three quarters full
- Natural gas production growth continues despite more drilling rigs laid up
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
Oil markets absorbed another four-and-one-half million barrels of crude oil during the week ending March 6, 2015. This confirms the significantly oversupplied crude oil market that has been building since 2002-2003 when days of crude oil supply bottomed slightly above eighteen days of inventory. There are now 29 days of crude oil in storage, a number not seen since March of 1986.
Refineries are operating at reduced turnaround levels and demand has been treading water slightly below twenty million barrels daily since 2008 despite lower product prices.
So much crude oil supply, at best modest demand and important strictures on crude oil exports should translate into significantly lower crude oil prices. And from June, 2014 through January, 2015, crude oil prices fell sharply from $107.73 on June 20, 2014 to $43.58 on January 29, 2015. The industry added another 35.8 million barrels to supply since then. Prices ended their down swing, trading between $47 and $54.
The industry press is replete with stories of swollen inventories, an observation at odds with the reality of narrow range trading for crude oil. One analyst wrote, “WTI could take another leg down… If there’s enough distress, if imports into the U.S. don’t budge, which they won’t … if exports don’t rise quickly enough, which is a wild card, then producers at various locations need to shut in pipelines or run at low utilization so it doesn’t come to Cushing.”
It is hard to explain why, in the face of so much bearish information, crude oil prices have not reached $40 or even a price in the $20’s as predicted by one analyst. One possibility is the expectation that, as spring advances, demand will pick up and eat into the crude oil overhang.
Geopolitics may be at work too. Negotiations with Iran over its nuclear program may not succeed and the prospect of Iranian crude oil adding to supply may come up short. Moreover, the situation in Libya is very unstable. Loss of supply could be supporting prices as well.
Supply/Demand Balances
Supply/demand data in the United States for the week ending March 6, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum increased 2.5 million net barrels during the week ending March 6, 2015.
Draws were reported for gasoline, K-jet, propane, ethanol, other oils, and residual fuel oil. Distillate fuel oil had a moderate gain.
Crude oil supplies in the United States increased to 448.9 million barrels, a build of 4.5 million barrels.
Gulf Coast crude oil supplies rose 2.5 million barrels, increasing regional supply to 222.4 million barrels. Midwest crude oil stocks grew 1.6 million barrels, West Coast crude oil inventories increased 0.5 million barrels, and the Rockies rose 200,000 barrels. East Coast facilities saw a 400,000 barrel decline.
Cushing, Oklahoma inventories rose 2.3 million barrels. This puts Cushing storage at 51.5 million barrels, a level not seen since May 31, 2013. With the weather warming in crude oil producing regions, such as in the Bakken, more production could be expected in the coming weeks, further adding to the supply glut.
Domestic crude oil production rose by 42,000 barrels daily to 9.366 million barrels. Crude oil imports averaged 6.79 million barrels per day, a daily decrease of 575,000 barrels.
Refineries utilized 87.8 per cent of capacity, an increase of 1.2 percentage points.
Crude oil inputs to refineries rose by 187,000 barrels daily; there were 15.3 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, increased 210,000 barrels per day to 15.61 million barrels daily.
Total petroleum product inventories saw a decrease of 2.1 million barrels. Gasoline stocks declined 200,000 barrels.
Total product demand decreased 1.05 million barrels daily to 18.61 million barrels.
Demand for gasoline declined 115,000 barrels per day to 8.52 million barrels daily.
Distillate fuel oil supply rose 2.5 million barrels from supply. Stocks are 125.5 million barrels. National demand was reported at 3.76 million barrels per day during the report week. This was a weekly decrease of 295,000 barrels daily.
Propane stocks fell 1.3 million barrels. There are 53.7 million barrels in storage. Current demand is estimated at 1.3 million barrels per day.
Natural Gas
According to EIA: Working gas in storage was 1,512 Bcf as of Friday, March 6, 2015, according to EIA estimates. This represents a net decline of 198 Bcf from the previous week. Stocks were 483 Bcf higher than last year at this time and 225 Bcf below the 5-year average of 1,737 Bcf.
The EIA’s Short-Term Energy Outlook confirms the continuing high levels of natural gas production. Despite declining prices and rig counts, marketed production reached 78.8 Bcf per day in December, 2014. EIA chalks up the anomaly to improving rig efficiency. Natural gas output rose 6.1 per cent for all of 2014. This was the strongest growth since 2011.
Growth in the industrial and electric power sectors could drive natural gas consumption to 75.7 Bcf/d in 2015 and 76.2 Bcf/d in 2016. Demand in 2014 came in at 73.5 Bcf/d. EIA projects natural gas consumption in the power sector to grow by 8.1% in 2015 and by 1.9% in 2016.
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. 62
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