Weekly Energy Market Situation-March 7, 2022

Oil Prices Extend Their Rally

Oil stocks low at start of Ukraine conflict
ULSD prices have nearly doubled since early December
Returning to “normal” is a challenging proposition
Natural gas headed to Europe.

Alan Levine—Chairman, Powerhouse

(202) 333-5380

The Matrix

Spot futures prices of petroleum liquids vaulted upwards last week. War in Ukraine exacerbated the tight supply situation that had begun early last year. Stocks of ULSD are 119 million barrels now; they were 164 million barrels in Feb. 2021.This is a decline of 27% over the period. Maybe more telling is that there are only 27.5 day’s supply now. There were 47 day’s supply in January 2021.

Little wonder, then, that ULSD spot futures ended last week at $3.84, a gain of nearly $0.25 (7.1%.) Prices have moved higher without a serious setback since early December when they bottomed at $2.01. Prices nearly doubled during this time. ULSD prices have broken all resistance; there remains only the objective at $4.16 seen in July 2008 (and whatever theoretical targets derived from technical charts lie above.)

WTI prices have been as volatile as ULSD. Last week, spot futures reached $116.57 before settling slightly below that. The most recent advance began at the New Year, with prices at $62.43, increasing value by 87%. Analysts have reacted strongly. One Wall Street bank now anticipates year-end 2022 prices at $185 per barrel. That’s about the same as $147.27 in August 2008, adjusting for inflation (and assuming disruption of Russian oil.)

Steady growth in product demand has followed the sharp drop experienced at the height of the pandemic when demand fell below 15 million barrels daily.

This growth is not expected to falter as the United States emerges from the pandemic with high employment and significantly unsatisfied supply-chain based demand fulfillment. It’s fair to wonder how the petroleum economy returns to a more “normal” footing.

This is a challenging proposition. The current supply tightness has many fathers, progeny of strong, often overreaction, to the state of climate deterioration. Governments and private businesses have reacted rapidly, to combat the perceived climate threat.

Environmentalists have turned to renewables as a solution. These are not ready to carry the load of a low-carbon economy. Sources of capital for traditional exploration and production of fossil fuels are harder to come by. Moreover, U.S. importers of oil have been reluctant to buy Russian oil, adding to the problem.

Typically, the Saudis (maybe OPEC+ too) would be looked to for new supply. OPEC has already withheld oil from the market to support price. What price would the Saudis exact to open their taps? Powerhouse has noted several times the travails of African OPEC in providing more oil. Unless demand destruction appears, higher for longer seems to be the tune of the day.

Domestic production growth has come to a halt. Weekly output has stalled at 11.6 million barrels per day for most of 2022, falling for two recent weeks by 100,000 barrels daily. One equity investor notes that U.S. producers are, “restricting supply because they are desperate to be profitable. Shareholders are demanding free cash and shareholder democracy.

Nuclear power has an anchor around its neck and fusion seems a long way off. Many economists see continued growth, but trends do turn. The end of the rally in 2008 saw crude oil fall to $32.40 by year end. ULSD reached $1.28.

Supply/Demand Balances

Supply/demand data in the United States for the week ended Feb. 25, 2022, were released by the Energy Information Administration.

Total commercial stocks of petroleum fell 3.9 million barrels during the week ended February 25, 2022.

Commercial crude oil supplies in the United States decreased by 2.6 million barrels from the previous report week to 413.4 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Down 1.2 million barrels to 7.1 million barrels
PADD 2: Down 1.3 million barrels to 101.9 million barrels
PADD 3: Plus 0.6 million barrels to 230.4 million barrels
PADD 4: Minus 0.1 million barrels to 24.1 million barrels
PADD 5: Minus 0.6 million barrels to 50.0 million barrels

Cushing, Oklahoma, inventories were down 1.0 million barrels from the previous report week to 22.8 million barrels.

Domestic crude oil production was unchanged from the previous report week at 11.6 million barrels daily.

Crude oil imports averaged 5.767 million barrels per day, a daily decrease of 1,061,000 barrels. Exports increased 1,110,000 barrels daily to 3.796 million barrels per day.

Refineries used 87.7% of capacity; 3.0 percentage points higher from the previous report week.

Crude oil inputs to refineries increased 152,000 barrels daily; there were 15.398 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 57,000 barrels daily to 15.904 million barrels daily.

Total petroleum product inventories fell 1.4 million barrels from the previous report week.

Total product demand fell 654,000 barrels daily to 20.830 million barrels per day.

Gasoline stocks decreased 0.5 million barrels from the previous report week; total stocks are 246.0 million barrels.

Demand for gasoline increased by 86,000 barrels per day to 8.743 million barrels per day.

Distillate fuel oil stocks decreased 0.6 million barrels from the previous report week; distillate stocks are at 119.1 million barrels. EIA reported national distillate demand at 4.450 million barrels per day during the report week, an increase of 217,000 barrels daily.

Propane stocks decreased 0.8 million barrels from the previous report week; propane stocks are at 37.2 million barrels. The report estimated current demand at 1.477 million barrels per day, a decrease of 403,000 barrels daily from the previous report week.

Natural Gas

The ramifications of Germany’s withholding of certification of Nord Stream 2 have been explored previously by Powerhouse. U.S. natural gas LNG exports, however, should be part of the solution. Henry Hub natural gas futures are, in fact, starting to move higher notwithstanding that the United States is entering a low-demand shoulder season.

High prices have pulled U.S. LNG exports towards Europe. About three-quarters of exports were destined for Europe in February. Spot natural gas futures ended last week’s action at $5.02, the top of the week’s range, the low of which was $4.34. Prices have been pressing higher since February 11, bottoming then at $3.88.

U.S. export capacity has reportedly reached a short-term maximum. Longer-term, security and availability concerns could heighted interest in the U.S. as an alternative source.

Total supply is expected to be 1.4 Tcf as the withdrawal season ends. This would be 255 Bcf lower that the five-year average.

According to the EIA:

The net withdrawals from storage totaled 139 Bcf for the week ended February 25, compared with the five-year (2017–2021) average net withdrawals of 98 Bcf and last year’s net withdrawals of 132 Bcf during the same week. Working natural gas stocks totaled 1,643 Bcf, which is 255 Bcf lower than the five-year average and 216 Bcf lower than last year at this time.

The average rate of withdrawals from storage is 8% higher than the five-year average so far in the withdrawal season (November through March). If the rate of withdrawals from storage matched the five-year average of 6.8 Bcf/d for the remainder of the withdrawal season, the total inventory would be 1,411 Bcf on March 31, which is 255 Bcf lower than the five-year average of 1,666 Bcf for this time of year.

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