A New Administration Could Face Recession
- Recession often accompanies change in U.S. administration
- Supply build softens price
- U.S. production starts to recover
- Natural gas prices inhibited by low HDD build
The Matrix
The impending change of administration highlights a question that has occupied economists for many years. Such a change has almost always been accompanied by a recession. Cause and effect relationships are hard to pin down, but the reality of a slower economy when national leadership changes is hard to refute.
The oilman’s concern is the effect of a weaker economy on demand and the potential for supply builds that might follow. The chart of global demand for liquids shows generally weaker demand growth for oils since 1966.
Two geopolitical events, the 1973 Arab oil embargo and the Iranian revolution, rallied prices and cut demand. Two other financial crises, in 1993 and 2008 – 2009, led to reduced energy usage. Putting these specific events aside, declining growth has been a feature of energy demand for many years.
Data from the Energy Information Administration (EIA) for the week ending October 28, 2016, points up the build in supply facing the market. An increase in crude oil supply of 14.4 million barrels brought domestic availability to 482.6 million barrels. This brings supply back to August levels and could set the stage for further price weakness when a new administration faces the prospect of recession.
A small, but potentially significant, shift in our sources of supply was domestic production of crude oil. New production was put at 8.522 million barrels daily. This was the third consecutive gain in production after many months of falling supply.
Oil prices are softening under the press of new supply. West Texas Intermediate (WTI) crude oil faces support at $44.25 and then $43.75. A three handle was last seen in August.
Supply/Demand Balances
Supply/demand data in the United States for the week ending October 28, 2016, were released by the EIA.
Total commercial stocks of petroleum increased 9 million barrels during the week ending October 28, 2016.
Draws were reported in stocks of gasoline, fuel ethanol, K-jet fuel, distillates and other oils. Builds were reported in stocks of residual fuel oil and propane.
Commercial crude oil supplies in the United States increased to 482.6 million barrels, a build of 14.4 million barrels.
Crude oil supplies increased in four of the five PAD Districts. PAD District 2 (Midwest) crude oil stocks grew 2.7 million barrels, PADD 3 (Gulf Coast) crude oil stocks expanded 8.1 million barrels, PADD 4 (Rockies) stocks increased 0.7 million barrels and PADD 5 (West Coast) stocks grew 3.1 million barrels. A draw of 0.2 million barrels was reported in crude oil stocks at PAD District 1 (East Coast).
Cushing, Oklahoma, inventories increased 0.1 million barrels to 58.5 million barrels.
Domestic crude oil production increased 18,000 barrels daily to 8.522 million barrels per day.
Crude oil imports averaged 8.995 million barrels per day, a daily increase of 1.979 million barrels. Exports declined 11,000 barrels daily to 404,000 barrels per day.
Refineries used 85.2% of capacity, a decrease of 0.4 percentage points from the previous report week.
Crude oil inputs to refineries decreased 104,000 barrels daily; there were 15.552 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased 87,000 barrels daily to 15.7 million barrels daily.
Total petroleum product inventories saw a decrease of 5.4 million barrels from the previous report week.
Gasoline stocks declined 2.2 million barrels; total stocks are 223.8 million barrels.
Demand for gasoline increased 65,000 barrels per day to 9.183 million barrels daily.
Total product demand fell 581,000 barrels daily to 19.884 million barrels per day.
Distillate fuel oil supply decreased 1.8 million barrels; total stocks are 150.6 million barrels. National distillate demand was reported at 3.863 million barrels per day during the report week. This was a weekly decrease of 303,000 barrels daily.
Propane stocks increased 0.3 million barrels to 100.9 million barrels. Current demand is estimated at 1.106 million barrels per day, a decrease of 25,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Injections into storage are lower than average as many storage facilities are close to full. Net injections into storage totaled 54 billion cubic feet (Bcf), compared with the five-year (2011 – 2015) average net injection of 63 Bcf and last year’s net injections of 58 Bcf during the same week. Working gas stocks total 3,963 Bcf, which is 173 Bcf more than the five-year average and 48 Bcf more than last year at this time, when working gas stocks set a new five-year high.
2016 Injection Season Sees Record Natural Gas Demand
Total natural gas demand in the lower 48 states reached record levels during the 2016 injection season (April – October). Natural gas consumption and net exports averaged 71.4 billion cubic feet per day (Bcf/d)—2.2 Bcf/d above the 2015 injection season, which held the previous record.
Several factors contributed to the narrowing of supply and demand over this period:
- The rise in natural gas use for electricity generation (power burn)
- The opening of Sabine Pass, the first liquefied natural gas (LNG) export terminal in the lower 48 states, marked the onset of a new demand source.
- Lower natural gas prices lessened the incentive to produce natural gas.
Natural gas prices reflect disappointing development of heating degree days (HDDs) thus far in 2016. The Climate Prediction Center of the National Weather Service reports the U.S. has accumulated 47% fewer HDDs than normal since July 1, 2016. The country has seen 27% fewer HDDs than last year.
Little wonder, then, that prices are losing any lift they received when rolling from the November to the December natural gas contract as the spot futures contract. The final settlement price of the November contract was $2.764. December futures opened as spot at $3.081. This gap of nearly 32 cents rapidly gave way under the bearish pressure of poor demand expectations.
The June 2016 contract expired at May’s end around $1.90. July futures became spot at $2.145. The 23.6 cent gap in the charts remains open. It is a logical target for technical traders if nearby support at $2.62 is broken.
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.
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