Weekly Energy Market Situation, March 17, 2014

Oil markets were caught last week between bullish near-term repercussions of events in the Ukraine and bearish, broader implications of a slowing Chinese economy.

Supply and demand data for petroleum were in line with expectations.

The data on natural gas demand is strong. Demand exceeded prior winter by 10% and was 13% higher than the average of previous 5 years.

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

Oil markets were caught last week between bullish near-term repercussions of events in the Ukraine and bearish, broader implications of a slowing Chinese economy.

Refinery output in China has fallen in the first two months of the year to 9.77 million barrels daily, a decline of 2.3 per cent year-on-year. The country also experienced reduced net product imports during this period. Imports fell by nearly a third to 200 thousand barrels daily.

The situation in Ukraine has been very fluid. Russian influence in the Crimea is a fait accompli and Russian troops are said to be massing on Ukraine’s eastern border. Western nations are concerned that any protracted sanctions imposed on Russia will not be without repercussions, especially reductions of new energy supplies into Western Europe from Russia.

Political interests in the United States are urging export of natural gas as our own version of an Energy Weapon. As a practical matter, there are many barriers facing this objective. Infrastructure for liquefaction needed to support exports is not in place and LNG exports from the US are very small. The first important LNG export facility will not be in place until late 2015.

The US government does not direct geographic destinations for exports. In the free market, it is likely that exports would go towards Asia, not Europe.

Oil product prices appear to be range bound. ULSD is now approaching $2.92, near the bottom of a range in effect since late February, 2011. RBOB prices now reflect spring’s low-RVP specification. The April contract is trading around $2.96. Support can be found at $2.8650. Crude oil, basis April WTI, fell sharply during the week, but is now basing, waiting the next shock from Eastern Europe.

Natural gas prices are breaking down, notwithstanding low inventories last seen more than a decade ago ending the withdrawal season.

Supply/Demand Balances

Supply/demand data for the week ending March 7, 2014 were released by the Energy Information Administration. Balances were more in line with seasonal expectations, reflecting the ending of winter and a return to the status quo geopolitically.

Total commercial stocks of oil fell 1.6 million barrels. The most interesting information was that crude oil supplies rose 6.2 million barrels during the report week. This included a modest increase in imports of 200,000 barrels daily to 7.3 million barrels daily.

The crude oil supply situation was particularly soft on the Gulf Coast where 7.4 million barrels of crude oil were added to supply. Inventories in the area are at 189.5 million barrels, continuing a pattern of gain from January 24th, when supplies were at 156.3 million barrels, 33 million barrels fewer.

This increase has raised questions of inventory containment problems in the area. Regional storage has reportedly become tight. Current stocks are now only about ten million barrels below the record high of April 2009.

Moreover, refinery turnaround acted to reduce crude oil demand. Crude oil run to stills fell 225,000 barrels daily, falling below 15 million barrels daily for the week. This was the first dip below 15 million since last October.

Gasoline stocks fell to 223.8 million barrels, a weekly drop of 5.2 million barrels. The decline reflects a weekly gain in demand of 538,000 barrels daily. It also includes reductions in winter grade supplies mandated by the shift to spring grade, low RVP stocks.

Propane inventories fell 1.1 million barrels to 26.1 million barrels. Supplies are hugging the lower end of the range of the past five years. This can be seen in the chart, taken from Powerhouse’s suite of EIA supply/demand charts found at www.powerhouseTL.com.

Natural Gas

According to the EIA: Working gas in storage was 1,001 Bcf as of Friday, March 7, 2014, according to EIA estimates. This represents a net decline of 195 Bcf from the previous week. Stocks were 958 Bcf less than last year at this time and 858 Bcf below the 5-year average of 1,859 Bcf.

Current storage is slightly more than half the amount of inventory available last year at this time. Replenishment of storage to 3.6 Tcf by the beginning of next winter’s withdrawal seems problematic at best. The record-breaking withdrawal of the winter now ending brought stocks to an eleven year low.

The data on demand is compelling:

From November, 2013 thru March, 2014 US consumption of natural gas reached 91.2 Bcf per day.
Demand exceeded the prior winter by 10 per cent and 13 per cent over the average of the past five years.
The residential/commercial component of demand gained 17 per cent over the prior winter.

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