Energy prices were indecisive last week. Events set in motion in Ukraine have not fully played out, and markets are watchfully waiting.
Supply/demand balances were affected by increasing crude oil stocks and declining product stocks. These would seem to argue for strength in product crack spreads, but they performed bearishly.
Supplies of crude oil at Cushing OK moved below 30 million barrels, reflecting additional offtake through new pipelines to the Gulf Coast.
Natural gas underground storage fell below one Tcf in the most recent report issued by EIA. They are only half as large as they were last year at this time.
Alan Levine
Chairman, Powerhouse
The Matrix
Last week’s market activity is best described as “indecisive,” after the prior week’s action and reaction to events in the Ukraine. At writing, WTI is trading at $99.51 – almost precisely where the week’s trading began. A weekly candlestick chart shows the “Doji” pattern – a measure of a market in balance after the large selloff of the previous week.
A Doji reveals a close struggle between buyers and sellers and can often foreshadow reversal.
A similar situation occurred in November, 2013 when WTI traded a Doji during the week of November 8. This followed eight weeks of bearish action. The market remained balanced for four weeks before a new rally into the end of the year.
It is not clear that a similar rally will follow, but at a minimum, the events of early March are likely fully absorbed by the market.
Supply/Demand Balances
Supply/demand data for the week ending March 14, 2014 were released by the Energy Information Administration. The data were consistent with expectations for late winter: increasing crude oil stocks and falling product stocks reflected refinery turnaround activity. Nonetheless, crack spreads were weak. The May gasoline crack spread lost about $5.50 in the first four days of this week.
Total commercial stocks of oil fell one half million barrels. The most interesting information was that crude oil supplies rose 5.9 million barrels during the report week. This was in addition to the 6.2 million barrels added two weeks ago. Since January 10th, refiners have added 25.6 million barrels to crude oil stocks. Imports were unchanged at 7.3 million barrels daily.
The crude oil supply situation was again particularly soft on the Gulf Coast where 4.8 million barrels of crude oil were added to supply. Cushing OK contributed to the gain, losing one million barrels of stock to 29.8 million barrels on hand.
Over the past seven weeks, stocks at Cushing have fallen 29 per cent. They are now 19 million barrels lower than a year ago and at the lowest level since early 2012.
The drain of supplies at Cushing is the result of new pipeline infrastructure and other workarounds decreasing reliance on storage at Cushing. In particular, TransCanada’s Marketlink pipeline is moving crude oil to the Gulf Coast. And in PADD 2, where Cushing is located, crude oil has been running at high rates in regional refineries. Other changes in the distribution pattern of domestic crude oil distribution have been the expanded pipeline network and substantial growth in rail shipments to East coast refineries.
Notwithstanding the declining level of crude oil stocks at Cushing, this place will remain important. Inventories are still well above levels of 2005 – 2008. The rationale for high stocks at Cushing reflects the growing volume of Midcontinent tight oil formations in recent years. Cushing was where Midcon crude oil was stored before there was sufficient infrastructure to move supplies to Gulf Coast refiners. New pipes are moving supplies south, hence the drain. There will remain enough crude oil to supply regional refiners as in the past. Moreover, it is still the pricing location for WTI crude oil futures; there has been no suggestion to replace it with another crude oil marker.
According to EIA, “PADD 2 refinery utilization averaged 92% in 2014 through March 14, up from 89% over the same period in 2013. Refinery utilization in PADD 3 was also higher, up 4%, even though PADD 3 refinery capacity increased. Refinery crude inputs in PADDs 2 and 3 for year-to-date 2014 through March 14 averaged 780,000 bbl/d higher than in 2013.”
Gasoline stocks fell to 222.3 million barrels, a weekly drop of 1.5 million barrels. The decline came about despite a weekly drop in demand of 437,000 barrels daily. Stocks are lagging behind last year at this time.
Propane inventories added 100,000 barrels during the week, now at 26.2 million barrels. Supplies are hugging the lower end of the range of the past five years.
Natural Gas
According to the EIA: Working gas in storage was 953 Bcf as of Friday, March 14, 2014, according to EIA estimates. This represents a net decline of 48 Bcf from the previous week. Stocks were 932 Bcf less than last year at this time and 876 Bcf below the 5-year average of 1,829 Bcf.
Total consumption increased 5.2% week over week, with increases occurring in all sectors. Total supply increased 0.3% this week, as increases in domestic production and flows to the Northeast from Canada offset declines in Canadian natural gas imports into the West and Midwest.
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. 12
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