Bearish Outlook Intensifies

  1. U.S. crude oil production accelerates
  2. U.S. refinery use accelerates
  3. IEA expects demand growth to slow in 2017
  4. Natural gas in underground storage reaches record 3.986 Tcf as injection season ends

Al pic 2009_cropped

Alan Levine, Chairman of Powerhouse


The Matrix

United States crude oil production accelerated during the week ending November 4. In Powerhouse’s “Weekly Energy Situation” for November 7, we noted that, after many months of declining output, production had its third week of increases. The Energy Information Administration (EIA) report for the week ending November 4, 2016, showed weekly output of 8.7 million barrels daily, a week-on-week gain of 2%. The increase confirmed that fracking is back. Improved efficiency has made fracking at current levels attractive for producers.

The production report is bearish for price. It is supported by another bearish-for-products statistic: refinery utilization rose to 87.1%. This led to an increase in refiner and blender net gasoline production of 10.5 million barrels daily, a weekly gain of 632,000 barrels per day. Gasoline exports of 4.5 million barrels daily tempered the bearishness of high output.

Gasoline prices have been falling in any case. Trading now in the mid-$1.30s, nearby gasoline support is found at $1.2830. A break of this level invites support at $1.10 and then $0.90, last seen in February 2016.

Bearish gasoline prices are not unusual in winter. Low demand and the return of refineries to production provide higher gasoline stocks. Gasoline crack spreads also reflect surplus gasoline supply. The April gas crack topped out at $21 as November began. At writing, a 50% retracement to $17.89 is in sight.

Still more bearish news comes from the International Energy Agency (IEA). IEA expects consumption to continue to grow at 1.2 million barrels per day in 2017. This is a slowdown from a 2015 five-year peak of 1.8 million barrels daily.

Growth in demand, however, is set against an Organization of the Petroleum Exporting Countries (OPEC) agreement that is expected by many in the oil analytical community to fail, adding even more supply into the global economy (EIA reported an expansion of 800,000 barrels daily in global supply in October). IEA also project growth in non-OPEC output of 500,000 barrels daily in 2017. “This means that 2017 could be another year of relentless global supply growth similar to that seen in 2016,” the IEA said.

The agency also said, “There is currently little evidence to suggest that economic activity is sufficiently robust to deliver higher oil demand growth, and any stimulus that might have been provided at the end of 2015 and in the early part of 2016 when crude oil prices fell below $30 a barrel is now in the past.”


Supply/Demand Balances

Supply/demand data in the United States for the week ending November 4, 2016, were released by the Energy Information Administration.

Total commercial stocks of petroleum decreased 7.0 million barrels during the week ending November 4, 2016.

Draws were reported in stocks of gasoline, fuel ethanol, K-jet fuel, distillates, residual fuels, propane and other oils.

Commercial crude oil supplies in the United States increased to 485.0 million barrels, a build of 2.4 million barrels.

Crude oil supplies increased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks increased 0.1 million barrels, PAD District 2 (Midwest) crude oil stocks grew 1.1 million barrels, PADD 4 (Rockies) crude oil stocks expanded 0.5 million barrels, and PADD 5 (West Coast) stocks increased 1.8 million barrels. PADD 3 (Gulf Coast) crude stocks decreased 1.0 million barrels.

Cushing, Oklahoma, inventories were unchanged from the previous report week at 58.5 million barrels.

Domestic crude oil production increased 170,000 barrels daily to 8.692 million barrels per day.

Crude oil imports averaged 7.442 million barrels per day, a daily decrease of 1.553 million barrels. Exports rose 6,000 barrels daily to 410,000 barrels per day.

Refineries used 87.1% of capacity, an increase of 1.9 percentage points from the previous report week.

Crude oil inputs to refineries increased 369,000 barrels daily; there were 15.817 million barrels per day of crude oil run to facilities.

Gross inputs, which include blending stocks, increased 348,000 barrels daily to 16.048 million barrels daily.

Total petroleum product inventories saw a decrease of 9.4 million barrels from the previous report week.

Gasoline stocks declined 2.8 million barrels; total stocks are 221.0 million barrels.

Demand for gasoline increased 30,000 barrels per day to 9.213 million barrels daily.

Total product demand grew 306,000 barrels daily to 20.191 million barrels per day.

Distillate fuel oil supply decreased 1.9 million barrels; total stocks are 148.6 million barrels. National distillate demand was reported at 4.043 million barrels per day during the report week. This was a weekly increase of 180,000 barrels daily.

Propane stocks decreased 1.3 million barrels to 99.6 million barrels. Current demand is estimated at 1.302 million barrels per day, an increase of 196,000 barrels daily from the previous report week.


Natural Gas

According to the Energy Information Administration:

Net injections into storage totaled 54 billion cubic feet (Bcf), [for the week ending November 4, 2016] compared with the five-year (2011 – 2015) average net injection of 38 Bcf and last year’s net injections of 55 Bcf during the same week. This marked the first time in 26 weeks that net injections into storage exceeded the five-year average. Unseasonably mild temperatures mitigated consumption of natural gas and contributed to considerably larger-than-average net injections. Working gas stocks total 4,017 Bcf—a new all-time high. Additionally, working gas stocks are 189 Bcf more than the five-year average and 47 Bcf more than last year at this time.

Working natural gas in storage in the lower 48 states as of October 31, the traditional end of the refill season, reached a record level of 3,986 Bcf, as interpolated from EIA’s Weekly Natural Gas Storage Report data released today. This is 183 Bcf (5%) higher than the five-year (2011 – 2015) end-of-October average, and exceeds the previous end-of-October high of 3,929 set last in 2012. Net injections during this year’s refill season, which started on April 1, 2016, were 678 Bcf (31%) lower than the five-year average and 955 Bcf (39%) lower than injections last year.

Working gas stocks entered the refill season this year at a record high level, totaling 2,470 Bcf on March 31, 19 Bcf above the previous 2012 record. Since the beginning of the refill season, net injections into working gas stocks have totaled 1,516 Bcf. This is the second-lowest refill season since 2007, with injections this year exceeding only the 2012 tally of 1,456 Bcf.


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