1. WTI crude oil gains 58 per cent over the February lows
2. Technical market indicators suggest still room to go
3. Record crude oil inventories could cap rally
4. Record March gasoline demand
5. Natural gas rally in process

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse
 

2016-03-21_18-20-50

 

 

 

 

 

 

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

It’s becoming a familiar story. The Energy Information Administration reports further builds in crude oil inventories and domestic production over nine million barrels daily. Crude oil prices rally.

Following release of the data for the week ending March 11th, WTI spot futures moved over $41. This was a new high for crude oil, continuing the rally in place since February 11th when prices bottomed at $26.05.

This most recent rally has been very orderly. The gain of 58 per cent has proceeded with relatively few set-backs. Contrast this with the rally that followed the December 19, 2008 low of $32.40. This rally has taken about five weeks. In 2008, prices moved 56 per cent in fewer than three weeks before its first retracement.

The more leisurely pace now probably reflects concern that underlying the rally is a market well-supplied, ready to offer crude oil at any additional price increase.

Nonetheless, technical analysis is insistently supporting the rally. Supporting statistics like the Relative Strength Indicator or the Slow Stochastic are not overbought—an indication that upward momentum has not yet flagged. Elliott Wave counts are bullish too. One count puts the rally in a third wave. This pattern anticipates a modest retracement with upside possibilities around $42.50 and, if exceeded, $50 before a larger sell-off.

One caution is needed: Even a rally of the magnitude suggested does not translate into business as usual prices pre-2014. The agreement to freeze output near all-time highs is a candid admission that the effort to rein in new non-OPEC producers (read U.S. shale oil producers) has reached its limits. Iran’s adamant refusal to join in is further evidence that these are new times. The old order has changed and is not likely to return any time soon.

Oil markets will still face volatility and seasonality. Oil remains a highly geopolitically sensitive commodity but U.S. markets are less likely to react violently to overseas events than in the past.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending March 11, 2016 were released by the Energy Information Administration.

Total commercial stocks of petroleum increased 1.8 million net barrels during the week ending March 11, 2016.

Builds were reported in stocks of K-jet fuel, propane, and other oils. Draws were reported in stocks of gasoline, fuel ethanol, distillates, and residual.

Crude oil supplies in the United States increased to 523.2 million barrels, a build of 1.3 million barrels. Government data show this is a new record for U.S. commercial crude oil storage.

Crude oil supplies decreased in three of the five PAD Districts. PADD 1 (East Coast) crude oil stocks decreased 1.7 million barrels, PADD 4 (Rockies) stock fell 0.3 million barrels, and PADD 5 (West Coast) stocks retreated 1.1 million barrels. PAD District 3 (Gulf Coast) crude oil stocks increased 4.2 million barrels, and PADD 2 (Midwest) crude stocks were unchanged from the previous report week.

Cushing, Oklahoma inventories increased 0.6 million barrels to 67.5 million barrels. This puts Cushing commercial crude oil stocks at a record high, according to the EIA.

Domestic crude oil production decreased 10,000 barrels daily to 9.068 million barrels per day.

Crude oil imports averaged 7.693 million barrels per day, a daily decrease of 355,000 barrels.

Refineries used 89.0 per cent of capacity, a decrease of 0.1 percentage points from the previous report week.

Crude oil inputs to refineries increased 85,000 barrels daily; there were 15.996 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased 23,000 barrels to 16,169 million barrels daily.

Total petroleum product inventories saw an increase of 0.5 million barrels from the previous report week.

Gasoline stocks decreased 0.7 million barrels; total stocks are 249.7 million barrels. Demand for gasoline increased 47,000 barrels per day to 9.458 million barrels daily. This demand level was reportedly a record amount for the second week of March.

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Total product demand decreased 604,000 barrels daily to 19.260 million barrels per day.

Distillate fuel oil supply decreased 1.1 million barrels; total stocks are 161.3 million barrels. National distillate demand was reported at 3.870 million barrels per day during the report week. This was a weekly increase of 164,000 barrels daily. Distillate inventories are 35.5 million barrels higher than at this time last year.

Propane stocks increased 0.2 million barrels to 62.5 million barrels. This build in stocks snaps a ten week streak of propane draws. Current demand is estimated at 1.155 million barrels per day, a decrease of 86,000 barrels daily from the previous report week.

Natural Gas

According to the EIA:

Working gas in storage was 2,478 Bcf as of Friday, March 11, 2016, according to EIA estimates. This represents a net decline of 1 Bcf from the previous week. Stocks were 998 Bcf higher than last year at this time and 807 Bcf above the five-year average of 1,671 Bcf. At 2,478 Bcf, total working gas is above the five-year historical range.

Substantial gas in storage has not been a barrier to the recent rally. Natural gas prices have added more than thirty cents since they bottomed at $1.612 on March 7th. As has been the case with petroleum liquids, the persistence of the move higher has raised the question whether a price bottom may have been established.

Fundamentals might remain weak, but one market technician is seeing signs supporting the possibility of price bottoming. A falling wedge pattern can be seen starting in mid-2014. Such a pattern shows support falling at a slower rate than resistance, providing a greater degree of support than resistance. It is a bullish sign.

There is also divergence between price and supporting statistics including the Relative Strength Index (RSI.) Moreover, market watchers are very pessimistic. According to MarketVane.net, 89 per cent of market observers were bearish at the lows. Time to go the other way?

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