- Crude oil approaching spring seasonal rally phase
- Supply glut in U.S. could limit price gains
- Gasoline crack spread pressured by low demand and regulatory uncertainty
- Natural gas stocks on track to end heating season over 2 Tcf
Sincerely, Alan Levine, Chairman of Powerhouse
The start of meteorological spring finds an oil market showing a slight break of the narrow price range we have been chronicling since the start of the year. This has severely complicated planning for petroleum product sellers who typically begin placing futures positions for the year around this time.
The usual indicators traders/marketers use to guide their activity are not helping. Price analysis shows, for example, that distillate fuel oil prices have risen 76% of the time between February and July since 1980. In the same way, crude oil prices have rallied 82% of the time over the same months since 1984.
This year has not given much support to these statistics. The failure of history as a guide can be seen in the data. The Energy Information Administration’s (EIA’s) weekly supply/demand balance shows crude oil stocks growing in eight consecutive weeks since December 30, 2016, an 8.6% gain. The gain includes a dramatic recovery in U.S. crude oil production, now solidly over 9 million barrels per day.
The growth in crude oil stocks has done little to soften futures prices. WTI futures have been trading resolutely between $50 and $54.50 since December with no challenge to this range. Similarly, distillate fuel oil prices have ranged between $1.60 and $1.70 over this time, only breaking support modestly most recently.
Summer grade RBOB (using the April RBOB contract) has traded in a 12-cent down channel. Press reports regarding possible changes in the determination of renewable identification numbers (RINs) values have led to a small break of the channel. Very soft gasoline demand must be recognized as a factor as well.
Gasoline crack spreads typically rally in late winter. This year, sub-par demand appears to have moved the gas crack spreads lower. A potentially significant change in where the Renewable Fuel Standard (RFS) RINs value is determined could have an important bearish effect on RBOB prices.
Refinery utilization has started to recover, gaining 1.7 percentage points, reaching 86%. This portends even more gasoline available into spring and creating demand for crude oil. The April gasoline crack spread reached a new low at $15.59 before a rally ensued.
Supply/demand data in the United States for the week ending February 24, 2017 were released by the EIA.
Total commercial stocks of petroleum increased 0.3 million barrels during the week ending February 24, 2017.
Builds were reported in stocks of fuel ethanol, K-jet fuel and residual fuel oil.
Draws were reported in stocks of gasoline, distillates, propane and other oils.
Commercial crude oil supplies in the United States grew to 520.2 million barrels, an increase of 1.5 million barrels.
Crude oil supplies increased in three of the five PAD Districts. PAD District 2 (Midwest) crude oil stocks expanded 1.3 million barrels, PADD 3 (Gulf Coast) stocks grew 2.3 million barrels, and PADD 4 (Rockies) stocks increased 0.3 million barrels. PADD 1 (East Coast) stocks declined 0.5 million barrels and PADD 5 (West Coast) stocks fell 1.7 million barrels.
Cushing, Oklahoma, inventories increased 0.5 million barrels from the previous report week to 63.5 million barrels.
Domestic crude oil production increased 31,000 barrels daily to 9.032 million barrels per day.
Crude oil imports averaged 7.589 million barrels per day, a daily increase of 303,000 barrels. Exports declined 490,000 barrels daily to 7.21 million barrels per day.
Refineries used 86.0% of capacity, an increase of 1.7 percentage points from the previous report week.
Crude oil inputs to refineries increased 393,000 barrels daily. There were 15.664 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 316,000 barrels daily to 15.886 million barrels daily.
Total petroleum product inventories saw a decrease of 1.1 million barrels from the previous report week.
Gasoline stocks decreased 0.5 million barrels; total stocks are 255.9 million barrels.
Demand for gasoline rose 22,000 barrels per day to 8.686 million barrels daily.
Total product demand decreased 0.864 million barrels daily to 19.496 million barrels per day.
Distillate fuel oil supply fell 0.9 million barrels to 164.2 million barrels. National distillate demand was reported at 3.813 million barrels per day during the report week. This was a weekly decrease of 479,000 barrels daily.
Propane stocks fell 0.5 million barrels to 49.3 million barrels. Current demand is estimated at 1.281 million barrels per day, an increase of 63,000 barrels daily from the previous report week.
According to the EIA:
Net injections into storage totaled 7 Bcf, compared with the five-year (2012 – 2016) average net withdrawal of 132 Bcf and last year’s net withdrawal of 67 Bcf during the same week. This is the first time that weekly net injections have ever been reported in February on a national level. There have been three other occasions when net injections have been reported during the peak heating demand months (December – February) in the 23-year history of the weekly working gas estimates. All of those occasions occurred in December.
Warmer temperatures throughout the week for most of the Lower 48 states contributed to decreased heating demand for natural gas and lower withdrawals from storage. Working gas stocks total 2,363 Bcf, which is 295 Bcf more than the five-year average and 187 Bcf less than last year at this time.
Working gas stocks on pace to end the 2016 – 2017 heating season above 2,000 Bcf. If working gas stock changes follow the five-year average for the remainder of the heating season, they will total 2,083 Bcf on March 31. So far in 2017, net withdrawals are 77% below the five-year average. Following this slower-than-normal pace, working gas stocks will total 2,241 Bcf by the end of the heating season, which would mark the third time since 2011 that working gas stocks ended the heating season above 2,000 Bcf.
The unusual injection was not immediately reflected in price. April futures rallied slightly. Nonetheless, larger fundamental forces are massing to limit further rally prospects. Natural gas demand is being impacted by alternative fuels; solar, wind and biomass sources are taking growing shares of power.
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.
Powerhouse is a registered affiliate of Coquest, Inc.
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