Oil Markets Showing Low Volatility

Some observations this week:

  1. Price volatility is diminishing.
  2. Market complacency is growing.
  3. Crude oil stocks fell 7.2 million barrels
  4. The decline in stocks reflects diminished crude oil imports.
  5. Natural gas injections were 106 Bcf. To reach the 5-year minimum by the end of October, injections need to average 105 Bcf.

Al pic 2009_cropped

Sincerely,
Alan Levine
Chairman, Powerhouse

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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

The story emerging from energy markets this week is diminishing volatility. Events overseas would ordinarily create price uncertainty and instability. This feature of markets has been notably missing in the current dustups in Ukraine, Libya, Venezuela, Nigeria and South Sudan among others.

It’s not hard to explain domestic tranquility in oil pricing. Crude oil production in the lower 48 states is running 7.9 million barrels daily, 16.7 per cent higher than last year as horizontal drilling and hydraulic fracturing offer new sources of supply. Stocks, previously stranded in Cushing Oklahoma have found their way to the Gulf Coast via new and reversed pipelines. And crude oil cannot be exported. This has created a huge stockpile of commercial crude oil, nearly 400 million barrels protecting local markets from foreign intrigues.

One measure of market instability is Historic Volatility (HV.) HV is a statistic that estimates annual price ranges based on recent activity. Crude oil, for example, showed an HV of 49.6 per cent in January 2009 when prices bottomed after the financial crisis of 2008. HV has shrunk to 16.6 per cent for May, 2014. This is as low as HV has been since August 1993. Gasoline and ULSD HV’s are even lower.

It’s more puzzling that Brent crude oil’s HV is lower still. Brent HV is 11.8 per cent. At current rates, one can expect only an 11.8 per cent price move this year in Brent crude oil. We would have expected that the range of geopolitical uncertainties outside the United States would have given Brent greater volatility, but that has not happened.

Low volatility suggests complacency. And there is little doubt that market participants have been complacent. It is in the nature of markets for economic factors and attitudes to react to change. We do not know what that change will be but it will occur. Traders need to anticipate that change and reject complacency.

 

Supply/Demand Balances

Supply/demand data for the week ending May16, 2014 were released by the Energy Information Administration.

Total commercial stocks of oil rose 2.1 million barrels. Commercial crude oil supplies lost 7.2 million barrels during the report week. The Strategic Petroleum Reserve lost 0.5 million barrels during the report week.

Crude oil imports fell below 6.5 million barrels daily, a reduction of 658,000 barrels daily for the week. This accounted for about two-thirds of the weekly draw in stocks. The accompanying chart shows import levels are now where they were in the late 1990’s. The reason for this, of course, is booming U.S. crude oil production, which reached 8.4 million barrels daily during the report week.

U.S. production has gone to replace imports. It is unlikely that the U.S. will back out all foreign supplies. In 2013, the United States imported 7.7 million barrels of crude oil daily. Of this, Canada (2.6 million barrels daily) and Mexico (0.8 million barrels per day) North America provided nearly half. Saudi Arabia (1.3 million barrels daily) and Venezuela (800,000 barrels per daily) provided most of the rest.

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PADD III crude oil stocks fell 5.7 million barrels. Crude oil stocks in the area are now 210.0 million barrels according to EIA. Cushing OK stocks continued their decline. There are now 23.2 million barrels of crude oil in inventory, 0.2 million barrels fewer than in the prior week. Utilization rates fell only 0.1 percentage points from the prior week’s 88.8 per cent of capacity. East Coast facilities operated at 91.3 per cent of capacity, adding 4.6 percentage points over the prior week.

Refiners ran crude oil at 15,949 million barrels per day, a weekly gain of 282,000 barrels daily. Gasoline production continued to exceed ten million barrels daily. Demand for the report week is still at 9.2 million barrels daily. Using a four week average, demand is running 5.3 percent higher than last year at this time. Exports take another 400,000 barrels daily out of the system. Gasoline added one million barrels to stock during the report week. Inventories on the East Coast accounted for a gain of 1.3 million barrels.

Distillate fuel oil supplies increased 3.4 million barrels during the report week to 116.3 million barrels. Supplies in the U.S. lag last year’s levels by 2.5 million barrels. Supplies of distillate fuel oil have remained below the lower level of the past five years. Distillate fuel oil demand was 3.8 million barrels daily.

Propane inventories added 2.2 million barrels in the U.S. PADD II stocks had a gain of 1.0 million barrels. Gulf Coast supplies grew 1.2 million barrels. The recovery in propane inventories has been impressive. Inventories have added 13.9 million barrels since the beginning of March. Propane demand was put at 983,000 barrels per day.

 

Natural Gas

According to the EIA: The net injection reported for the week ending May 16 was 106 Bcf, 16 Bcf larger than both the 5-year average net injection of 90 Bcf and last year’s net injection of 90 Bcf. Working gas inventories totaled 1,266 Bcf, 774 Bcf (37.9%) less than last year at this time, 943 Bcf (42.7%) below the 5-year (2009-13) average, and 698 Bcf (35.5%) below the 5-year observed minimum.

From the week ending on April 4 to the week ending on May 16, net storage injections have totaled 444 Bcf, versus 340 Bcf for the same seven weeks in 2013, and 395 Bcf for these weeks between 2009 and 2013, on average.

There are currently 24 more weeks in the standard injection season, which traditionally occurs April 1 through October 31. In order to reach EIA’s forecasted end of October working natural gas inventory level of 3,405 Bcf, an average injection of 89 Bcf per week will need to occur… EIA’s forecast for the end of October inventory levels are below the 5-year (2009-13) minimum value of 3,792 Bcf. To reach the 5-year minimum, average weekly injections through the end of October would need to be 105 Bcf.

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. 21


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