Growing Oil Glut is Pressuring Prices
- Saudi Arabia is maintaining production, seeking to force other producers to cut supply.
- Conflicts among producers abound, not always on economic grounds.
- US oil production exceeds nine million barrels daily.
- The natural gas rally did not sustain itself.
Click for larger table.
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
Mixed signals are coming out of the crude oil community. The growing glut of international crude oil supply has put pressure on prices. Saudi Arabia caused a stir by holding to higher production levels, opting instead to lower Official Selling Prices offered to Eastern Hemisphere buyers. This was taken to mean that the Kingdom sought to maintain market share and force other producers to cut output in support of higher prices.
Despite the Saudi posture, OPEC reported that the group’s production fell by 226,000 in October. This was largely because Saudi Arabia actually lowered production by about 70,000 barrels daily during the month. The conflict between reports of sustaining production and lowering price on the one hand, and other reports of reduced output raises the stakes in the OPEC meeting on November 27th.
There do not appear to be many physical or geopolitical factors to relieve the downward thrust of prices. Many U.S. producers are hedged on current production, offsetting any damage from lower prices.
The many parties involved have divergent interests that militate against cooperation in the near term. There is antipathy between Sunni Saudi Arabia and Shia Iran. This gives every reason for the Saudis to keep pressure on prices.
Low prices do not benefit the Russians. The United States government cannot control output, but certainly derives advantages from growing domestic production. The most recent weekly petroleum balance sheet shows the United States produced 9.1 million barrels per day of crude oil, a level not seen since early 1986.
The International Energy Agency expects global demand for energy to increase dramatically over the next twenty years. The group has expressed concern that geopolitical unrest in producing areas and challenges to creating effective energy policies could impair the ability to meet climate change goals. EIA expects global energy demand to grow 37 per cent by 2040.
Supply/Demand Balances
Supply/demand data in the United States for the week ending November 7, 2014 were released by the Energy Information Administration.
Total commercial stocks of petroleum lost 5.2 million net barrels from inventories. Declines occurred in most of the product categories. Other Oils had the largest decline (-4.2 million barrels) and Distillate Fuel Oil lost 2.8 million barrels of storage. Smaller reductions were recorded for Crude Oil (-1.7 million barrels.)
Distillate fuel oil’s decline occurred largely on the East and Gulf Coasts during the report week. ULSD stocks lost 3.7 million barrels. Distillate fuel oil inventories with more than 500 ppm rose 1.8 million barrels. Demand bounced back from the prior week’s decline to 4.0 million barrels daily. This was a gain of nearly one half million barrels.
Additions to stocks came to 4.3 million barrels. Gasoline accounted for 1.8 million barrels. Residual fuel oil added 1.1 million barrels to supply.
Gasoline stock gains reflected demand of 9.0 million barrels per day, a small decline from the prior week’s estimate of 9.2 million barrels daily. U.S. exports of gasoline account for 422,000 barrels daily taken from US supplies.
Gasoline production fell 350,000 barrels daily to 9.3 million barrels per day. Last year at this time, production was 9.4 million barrels per day.
The decrease in crude oil stocks represented reductions on the Gulf Coast (-2.9 million barrels) and on the West Coast where stocks fell 1.1 million barrels.
Increases in crude oil supplies were reported in the Midwest. Most of the gain was at Cushing where there are now 22.5 million barrels of stock. This is the highest Cushing stocks have been since May 23rd. This suggests that domestic crude oil stocks are filling Gulf Coast storage and supplies are backing up into Cushing, potentially very bearish for WTI price.
Click for larger table.
Refinery utilization recovered further. Refineries added another 1.7 percentage points as more facilities return to service.
Crude oil stocks lag last year’s level by 9.6 million barrels. Last year at this time, stocks were 12.2 million barrels higher than in October, 2012.
Crude oil imports were 6.9 million barrels daily during the report week, higher than the previous week by 202,000 barrels. They were 967,000 barrels less than last year. Imports lag 6.8 per cent from the same four-week period last year.
U.S. crude oil production was 9.063 million barrels a day according to the latest report. The Lower 48 states produced 8.542 million barrels daily.
Crude oil inputs to refineries were higher by 267,000 barrels daily, running at 15.7 million barrels per day during the report week. Refinery utilization recovered to 90.1 per cent of capacity. This was a weekly gain of 1.7 percentage points supporting the return of refinery capacity from turnaround.
Propane supplies added 1 million barrels. Stocks are now at 81.1 million barrels, the highest level recorded going back to early 1993. Inventories are 20.2 million barrels more than last year at this time. There are 63.1 days’ supplies in the system.
Gulf Coast stocks are 44.1 million barrels, up 0.6 million barrels for the week. Midwest stocks were down 0.2 million barrels at 26.7 million barrels.
Natural Gas
According to the EIA: Working gas in storage was 3,611 Bcf as of Friday, November 7, 2014, according to EIA estimates. This represents a net increase of 40 Bcf from the previous week. Stocks were 220 Bcf less than last year at this time and 237 Bcf below the 5-year average of 3,848 Bcf.
Powerhouse had expressed doubt that the rally bringing natural gas prices from $3.541 to $4.544 in ten trading sessions had staying power. This was confirmed as spot natural gas futures lost 56 cents in the next four days. Notwithstanding forecasts of cold weather, weakness in the energy futures complex caused a retracement of more than fifty per cent of that rally.
Any further weather gain is probably priced into the market. Moreover, high levels of production show no sign of abating. Under the circumstances, one might expect producers to react to currently higher prices by adding to short hedges.
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. 46
Was this memo helpful? We’d like your feedback. Please respond to [email protected] Copyright © 2014 Powerhouse, All rights reserved.
