OPEC Extends—Doesn’t Deepen—Crude Oil Output Cuts
- WTI prices fall; extension was expected
- Downside may be limited; bullish conditions developing
- Refinery use is up; exports are up too
- Natural gas price curves are turning bullish
Sincerely,
Alan Levine, Chairman of Powerhouse
The Matrix
Prices for West Texas Intermediate (WTI) crude oil gave way last Thursday, losing more than $2.60 in retreat from their recent high at $52.00. The decline followed the OPEC-non-OPEC announcement of an extension of their agreement to cut output. The cuts will go for nine months to March 2018 and the volume is expected to be unchanged from the first agreement, now ending.
The failure to cut production even further than the original 1.8 million barrels daily was reflected in the sharp bearish reaction of the market. It is consistent with our note last week, “A 2010 study of market action following a decision to cut output concludes the result is a short price rally. A rollover of an existing agreement, however, had little [bullish] impact on prices.”
The bulls’ disappointment may not translate into a wholesale selloff of prices. There appears to be about a half-billion barrels more in inventory of all oils than there is current demand, according to some analysts. The OPEC-non-OPEC cuts do not appear to have reduced supply meaningfully. Some recent activity may be a foreshadowing of a smaller excess.
There are plenty of bullish considerations that may well keep prices supported. There have been unusually large declines in product balances this spring. Refinery use has reached record levels, adding to the call on crude oil. Moreover, exports to Asia and Latin America have ballooned. These may be precursors to future declines in crude oil supplies.
Commercial crude stocks in the United states are now at 516 million barrels. Some specialists expect to see stocks fall below 500 million barrels in the next two months in response to the unusual declines noted above.
Of course, there are offsets, including new production that reached 9.320 million barrels daily in the most recent Energy Information Administration (EIA) weekly report. The Strategic Petroleum Reserve is being reduced in light of the nation’s growing energy independence. Nonetheless, declines in inventory cannot be dismissed and could limit the downside in WTI prices over the next few months.
Supply/Demand Balances
Supply/demand data in the United States for the week ending May 19, 2017, were released by the EIA.
Total commercial stocks of petroleum decreased 3.5 million barrels during the week ending May 19, 2017.
Draws were reported in stocks of gasoline, fuel ethanol, distillates and residual fuel. There were builds in stocks of K-jet, propane and other oils.
Commercial crude oil supplies in the United States decreased to 516.3 million barrels, a draw of 4.4 million barrels.
Crude oil supplies decreased in three of the five PAD Districts. PAD District 2 (Midwest) crude oil stocks fell 1.8 million barrels, PADD 3 (Gulf Coast) stocks declined 2.1 million barrels and PADD 4 (Rockies) stocks retreated 0.5 million barrels. PAD District 1 (East Coast) and PADD 5 (West Coast) crude oil stocks were unchanged from the previous report week.
Cushing, Oklahoma, inventories decreased 0.7 million barrels from the previous report week to 65.6 million barrels.
Domestic crude oil production increased 15,000 barrels daily to 9.320 million barrels per day.
Crude oil imports averaged 8.294 million barrels per day, a daily decrease of 296,000 barrels. Exports fell 461,000 barrels daily to 6.25 million barrels per day.
Refineries used 93.5% of capacity, an increase of 0.1 percentage points from the previous report week.
Crude oil inputs to refineries increased 159,000 barrels daily. There were 17.281 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 18,000 barrels daily to 17.402 million barrels daily.
Total petroleum product inventories saw an increase of 0.9 million barrels from the previous report week.
Gasoline stocks decreased 0.8 million barrels; total stocks are 239.9 million barrels.
Demand for gasoline rose 252,000 barrels per day to 9.704 million barrels daily.
Total product demand increased 1.311 million barrels daily to 20.795 million barrels per day.
Distillate fuel oil supply fell 0.5 million barrels to 146.3 million barrels. National distillate demand was reported at 4.359 million barrels per day during the report week. This was a weekly increase of 145,000 barrels daily.
Propane stocks rose 1.5 million barrels; total stocks are 43.7 million barrels. Current demand is estimated at 912,000 barrels per day, an increase of 364,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Smaller-than-average net injections into working gas storage reported in most regions of the Lower 48 states. Net injections into storage totaled 75 Bcf, compared with the five-year (2012 – 2016) average net injection of 90 Bcf and last year’s net injections of 71 Bcf during the same week
Working gas levels are 13% lower than last year’s record levels, but well ahead of the five-year average. Working gas stocks total 2,444 Bcf, which is 241 Bcf more than the five-year average and 371 Bcf less than last year at this time.
The January futures price is trading at a premium over the current spot price, but the premium is well behind last year’s level at this time. During the most recent storage week, the average natural gas spot price at the Henry Hub was $3.21/MMBtu, while the NYMEX futures price of natural gas for delivery in January 2018 averaged $3.64/MMBtu, a difference of 43 cents. The premium was $1.07 a year ago.
EIA’s reference to the changes in the futures prices suggests a situation turning bullish. Flattening the price curve means that buyers are more interested in acquiring the nearby contract than they were a year ago.
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