WTI Crude Oil Breaks Resistance
1. Crude oil on track for $40
2. New drilling unlikely at prices under $55
3. Refinery use bumps up
4. Natural gas prices reach $1.61 — equal a 1995 low
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
Tension between still-growing domestic inventories and persistent reports of shut-in oil wells has influenced movement of oil prices in recent weeks. WTI crude oil prices bottomed around $26 early in February. They have slowly recovered since then. Currently around $35, WTI has broken resistance with a $40 objective a real possibility.
And forty dollars represents an important level. Forty dollars, we are told, is the new Seventy. Domestic producers are likely to use that level to support opening of many wells that are DUC (Drilled but Uncompleted.) This, of course is the fracklog, the shale oil available to be produced at minimal incremental cost. It is, in effect, inventory not counted in the national balance. It is a short-term boost to supply.
Forty dollars does not include new production. Prices supporting new production have been bouncing wildly in recent months with $55 being a typical level suggested. And if new output is hedged, lower prices will matter less to producers, no longer a bar to production at lower prices.
Elsewhere in the petroleum complex, the seasonal slowdown in refinery use hit a little bump in the last EIA supply report. Utilization added one percentage point, increasing to 88.3 per cent. Nonetheless, gasoline production fell below ten million barrels, reducing new supply.
The decline in gasoline refinery production (and gasoline stocks with a drop of 1.5 million barrels) when set against the remarkable level of crude oil stocks is a formula for expanding gasoline crack spreads. This has not happened and spring gas cracks have been stalled below twenty dollars with little evidence of a bullish trend developing. This is especially troublesome in view of recent press reports that gasoline retail margins are under pressure.
In the same way, crude oil production fell marginally, but still exceeded nine million barrels per day. Despite the decline, domestic commercial inventories of crude oil rose 10.4 million barrels. This is again a new record at 518 million barrels.
Internal inconsistency in supply data confounds analysis. Nonetheless, seasonal factors remain in play and should not be ignored. The break of resistance in crude oil could open a path to at least a small rally as spring approaches.
Supply/Demand Balances
Supply/demand data in the United States for the week ending February 26, 2016 were released by the Energy Information Administration.
Total commercial stocks of petroleum increased 9.9 million net barrels during the week ending February 26, 2016.
Builds was reported in stocks of K-jet fuel, distillates, residual fuel oil, and other oils. Draws were reported in stocks of gasoline, fuel ethanol, and propane.
Crude oil supplies in the United States increased to 518.0 million barrels, a build of 10.4 million barrels. This is a new record for U.S. commercial crude oil storage, government data show.
Crude oil supplies increased in four of the five PAD Districts. PADD 1 (East Coast) crude oil stocks increased 0.9 million barrels, PADD 3 (Gulf Coast) crude oil stocks expanded 8.7 million barrels, PADD 4 (Rockies) stocks increased 0.2 million barrels, and PADD 5 (West Coast) crude oil stocks grew 2.4 million barrels. PADD 2 (Midwest) crude oil stocks decreased 1.9 million barrels.
Cushing, Oklahoma inventories increased 1.2 million barrels to 66.3 million barrels.
Domestic crude oil production decreased 25,000 barrels daily to 9.077 million barrels per day.
Crude oil imports averaged 8.292 million barrels per day, a daily increase of 490,000 barrels.
Refineries used 88.3 per cent of capacity, an increase of 1.0 percentage points from the previous report week.
Crude oil inputs to refineries increased 167,000 barrels daily; there were 15.852 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, increased 180,000 barrels to 16,037 million barrels daily.
Total petroleum product inventories saw a decrease of 0.5 million barrels from the previous report week.
Gasoline stocks decreased 1.5 million barrels; total stocks are 255.0 million barrels. Demand for gasoline decreased 455,000 barrels per day to 9.121 million barrels daily.
Total product demand decreased 1.469 barrels daily to 19.199 million barrels per day.
Distillate fuel oil supply increased 2.9 million barrels; total stocks are 163.6 million barrels. National distillate demand was reported at 3.364 million barrels per day during the report week. This was a weekly decrease of 340,000 barrels daily.
Propane stocks decreased 3.7 million barrels to 63.1 million barrels. Current demand is estimated at 1.613 million barrels per day, an increase of 67,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working gas in storage was 2,536 Bcf as of Friday, February 26, 2016, according to EIA estimates. This represents a net decline of 48 Bcf from the previous week. Stocks were 794 Bcf higher than last year at this time and 666 Bcf above the five-year average of 1,870 Bcf. At 2,536 Bcf, total working gas is above the five-year historical range.
Press reports noted “U.S. natural gas futures, [subsequent to release of the data] sank to within a penny of a 1995 low… If the contract falls below $1.61, it would drop to the lowest level since September 1995. Futures have been on a downward spiral for months. So far this year, the front-month has collapsed over 30 percent. Friday’s decline puts the front-month on track for a sixth down week in a row, the longest losing streak since January 2015.”
Elliott Wave counts five waves complete but with further lows possible. A potential double bottom at $1.68 on December 18, 20125 was broken on March 3, 2016, opening a path to $1.35, a level last seen in 1991. This was soon after the NG contract was first traded.
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