Weekly Energy Market Situation–May 31, 2022

Minimal Refinery Spare Capacity Affects Market

1. Russian oil is moving to China and India
2. Bank says retail gasoline could reach $6.20 by August
3. Contribution of Permian gas to national balances is likely to grow

 

Sincerely,

Alan Levine, Chairman

Powerhouse

(202) 333-5380

 

The Matrix

There’s no futures market in bearish energy news, and a good thing too. Anyone who bet on bearish energy news would have lost their shirt – or themselves been walking around in a barrel.

The dramatic decline in diesel prices that followed expiration of the May futures contract saw little follow-through in June futures contract. As July futures become spot, energy values appear to be set to recover.

Uncertainty rules. US sanctions are in place against Russia, (and separately against Iran and Venezuela.) But Russian oil is reportedly still flowing. Overtures are being made to Iran and Venezuela to ease those situations.

Oil supply from Russia has been especially confounding. Both the US and UK have imposed sanctions, and the EU has now done the same. But Russian oil production has fallen only one million barrels daily from their 11.4 million barrels per day pre-war level according to a large American bank. The same bank expects further declines to 10 million daily barrels output in 2023.

This minimal response to imposed limits may reflect less interest in deferring purchase of Russian oil by traders than earlier in the crisis. Even more important might be expanded exports to China and India. Russian exports eastward have reportedly more than doubled. Asia could reach limits to its capacity to take more oil, and prices could again resume their upward march.

The EU’s sanctions will take full effect towards the end of the year. They are not straight forward.  Pipeline deliveries to Hungary, Slovakia, and the Czech Republic are still exempted.

EU imports from Russia by pipeline account for 30% of its total. These will continue. The balance comes by sea. Crude oil limits will start in six months and products in eight. The overall aim is to stop 90% of Russian imports.

The problem of higher gasoline prices in the United States has been exacerbated by fraught refining conditions as well as heightened exports. Another US bank now anticipate US retail prices to reach $6.20 nationally by August. And should the hurricane season be as active as now predicted, even higher levels are possible.

 

The bank notes, “If elevated exports persist and refinery runs continue as expected, gasoline inventories could continue to draw to levels well below 2008 lows and retail gasoline prices could climb to $6/gal or even higher.”

The refinery situation seems unlikely to improve any time soon. At the pandemic’s outset, product demand fell and several facilities were shut permanently.  Demand has since recovered; not so refining capacity. Global capacity fell by 730,000 barrels per day in 2021. IEA notes this was the first such decline in 30 years. The list of shut-downs has continued in the United States.

New export opportunities have worsened domestic balances. Capacity use stands at 93.2%. Such intensity cannot be sustained over the long term. The population-dense Northeast has been hit hard. the Phillips New Jersey refinery has been running its catalytic cracker less, reflecting problems finding low vacuum sulfur oil.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ended May 20, 2022, were released by the Energy Information Administration.

Total commercial stocks of petroleum rose 0.7 million barrels during the week ended May 20, 2022.

Commercial crude oil supplies in the United States decreased by 1 million barrels from the previous report week to 419.8 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Plus 0.3 million barrels to 8.3 million barrels
PADD 2: Down 1.4 million barrels to 104.7 million barrels
PADD 3: Plus 0.1 million barrels to 234.2 million barrels
PADD 4: Plus 0.5 million barrels 24.4 million barrels
PADD 5: Down 0.5 million barrels to 48.2 million barrels

 

Cushing, Oklahoma, inventories were down 1.0 million barrels from the previous report week to 24.8 million barrels.

Domestic crude oil production was up unchanged from the previous report week at 11.9 million barrels daily.

Crude oil imports averaged 6.486 million barrels per day, a daily decrease of 82,000 barrels. Exports increased 821,000 barrels daily to 4.341 million barrels per day

Refineries used 93.2% of capacity; 1.4 percentage points higher from the previous report week.

Crude oil inputs to refineries increased 334,000 barrels daily; there were 16.269 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 265,000 barrels daily to 16.729 million barrels daily.

Total petroleum product inventories were plus 1.7 million barrels from the previous report week, rising to 734.3 million barrels.

Total product demand increased 23,000 thousand barrels daily to 19.684 million barrels per day.

Gasoline stocks decreased 0.5 million barrels from the previous report week; total stocks are 219.7 million barrels.

Demand for gasoline fell 229,000 barrels per day to 8.798 million barrels per day.

Distillate fuel oil stocks increased 1.7 million barrels from the previous report week; distillate stocks are at 106.9 million barrels. EIA reported national distillate demand at 3.867 million barrels per day during the report week, an increase of 51,000 barrels daily.

Propane stocks increased 1.8 million barrels from the previous report week; propane stocks are at 46.3 million barrels. The report estimated current demand at 633,000 barrels per day, a decrease of 429,000 barrels daily from the previous report week.

 

Natural Gas

Tight supply concerns in Europe have taken attention away from significant supply growth in the Permian Basin. The Basin, covering production in western Texas and New Mexico, put 16.7 Bcf/d on the market last year, a new record. DOE forecasts added output of 2.1 Bcf/d this year and 1.7 Bcf/d more in 2023. It has been recording steady growth since 2012.

 

Permian is second only to the Appalachian Basin (Pennsylvania, West Virginia, Ohio,) in the country. The Appalachian marketed 34.8 Bcf/d in 2021.

Most Permian gas is associated with output from crude oil wells. Therefore, the crude oil price is important for producers and drillers when determining oil well deployment. Expectations of high crude oil prices should lead to more oil well drilling with greater associated gas production.

The contribution of Permian gas to national balances is likely to grow as regional takeaway capacity expands. Three new pipelines, Permian Highway Pipeline, Whistler Pipeline and Double E Pipeline, add 5.5 Bcf/d to outlet capability. They will deliver to Mexico and the Texas Gulf Coast. Even more capacity is being developed. Akin to refining capacity limitations for crude oil, U.S. natural gas faces its own bottleneck.  While the EIA projects that annual U.S. LNG exports will increase by 2.4 bcf/day in 2022, only another 0.5 bcf/day of export capacity will be added in all of 2023.

According to the EIA:

Net injections [of natural gas] into storage totaled 80 Bcf for the week ended May 20, compared with the five-year (2017–2021) average net injections of 97 Bcf and last year’s net injections of 109 Bcf during the same week. Working natural gas stocks totaled 1,812 Bcf, which is 327 Bcf lower than the five-year average and 387 Bcf lower than last year at this time.

 

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