An OPEC Price War Ahead?

  1. Saudi Arabia has not reduced output to support prices — a policy shift.
  2. Price expectation for 2015 WTI have been lowered to low $90’s by analysts.
  3. EIA expects winter supply of distillate fuel oil to meet demand “readily.”
  4. Natural gas demand up 5.5 per cent for the week ending October 3, 2014.

 

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse
 

2014-10-14_14-40-32

Click Table to Enlarge

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

WTI crude oil prices broke below $86 per barrel last week, retreating to levels last seen during the European financial crisis of June-July 2012. The move from $107.73, reached as a high late in June, has been so precipitous that analysts are reconsidering expectations of where oil prices might go in the months ahead.

Longer-term price expectations have been lowered by some analysts to reflect the more bearish outlook presented by robust production, the apparent change in Saudi Arabia’s history of cutting output to support price and softening demand. This yields a new 2015 average WTI price outlook in the lower ‘90s. A long-term price bottom might be found around $80. This is a level where crude oil production might be shut in – the cost of incremental production.

Saudi Arabia lowered its crude oil sales price on October 1st. This supported market share rather than price. Moreover, U.S. production is increasing and is more efficient too. U.S. producers are getting more wells from each rig and more oil from each well.

U.S. crude oil output is increasing at the expense of imports. Weak overseas demand creates new challenges for OPEC. The EIA notes that global consumption had its slowest growth since 2011 in the second quarter. The rate of slowdown has been “nothing short of remarkable” according to the EIA. These considerations have led to speculation that OPEC nations might find themselves in a price war.

Another weather group, Liveweatherblogs.com has weighed in with its winter outlook. Midwest weather is projected to be a little above normal. The group expects New England and the Northeast to see a “warm start and a cold finish.”

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending October 3, 2014 were released by the Energy Information Administration.

Total commercial stocks of petroleum rose, adding 3.8 million net barrels to stocks. Increases were reported in supplies of crude oil which rose five million barrels. This was the second consecutive increase in inventories following many months of decline in crude oil supplies. It may reflect refining capacity being taken off line for turnaround. Another reason might be the slowing of global product demand.

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Smaller increases were seen in gasoline (+1.2 million barrels.) Gains were also seen in propane (+1.1 million barrels.)

Distillate fuel oil added 0.4 million barrels to supplies. Year-on-year, distillate stocks have now drawn even with last year, alleviating some concerns that inventory was lagging. Nonetheless, supplies are still at the lower end of the five year range for this time of year.

Inventory reductions were reported largely in other oils (-3.2 million barrels.)

Commercial crude oil stocks were 361.7 million barrels, a weekly gain of five million barrels during the report week. The gain was largely centered in the Midwest, where 3.1 million barrels were added to inventory.

Stocks are also 8.8 million barrels behind last year at this time. Most of the decline in crude oil stocks occurred in the Midwest, where 6.6 million barrels were taken from inventory.

Cushing, OK stocks lost 1.6 million barrels, falling to 18.9 million barrels. Cushing stocks are 13.7 million barrels below last year. This is because crude oil was being drained from Cushing following opening of transportation assets that took oil from Cushing to the Gulf Coast.

Crude oil inputs to refineries were lower by 0.1 million barrels daily, running at 15.6 million barrels per day during the report week.

Refinery utilization fell to 89.3 per cent of capacity. This was a weekly decline of 0.5 percentage points. This continues the much attenuated fall refinery turnaround now in play. As prices move lower, however, refiners may choose to take more capacity off line.

Crude oil imports were 7.7 million barrels daily during the report week. Imports were up more than 0.4 million barrels daily. They lag last year by 6.0 per cent from the same four-week period last year.

U.S. crude oil production remained at 8.9 million barrels a day according to the latest report. A modest gain was reported for Alaska. The Lower 48 states produced 8.4 million barrels daily.

Gasoline production fell to 8.9 million barrels per day, a weekly decline of nearly 200,000 barrels daily. Last year at this time, production was nearly 400,000 barrels per day higher. This supports the idea that gasoline demand has been getting softer.

Gasoline demand was slightly lower for the week at 8.6 million barrels per day. The increase in gasoline stocks of 1.2 million barrels brought inventories to 209.7 million barrels. Gains were seen mainly in PADD I, where supplies rose 1.3 million barrels during the report week.

Distillate fuel oil supplies increased 0.4 million barrels during the report week. The gains were seen on the East Coast, in the Midwest and on the West Coast. The East Coast added 0.4 million barrels of supply. Supplies in the U.S. have pulled even with last year’s levels.

The EIA’s Short-Term Energy and Winter Fuels Outlook notes: Distillate stocks in the Northeast totaled 29.3 million barrels on September 26, 0.2 million barrels below the same time last year and the lowest level for this time of year since 2000. However, unless severe weather in the Northeast coincides with severe weather in Europe, demand should be readily met via supplies from the Atlantic Basin market.

Distillate fuel oil demand fell 619,000 barrels daily to 3.5 million barrels per day. Refinery production of distillate fuels fell to 4.748 million barrels daily.

Propane inventories rose 1.1 million barrels in the U.S. Total stocks are 80.6 million barrels, 14.2 million barrels more than last year at this time. Gulf Coast stocks are 43.2 million barrels, up 0.7 million barrels for the week. Midwest stocks were unchanged at 28 million barrels.

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Natural Gas

According to EIA: This was the second straight week of triple-digit net injections. The net injection reported for the week ending October 3 was 105 Bcf, 21 Bcf larger than the five-year average net injection of 84 Bcf and 14 Bcf larger than last year’s net injection of 91 Bcf. Working gas inventories totaled 3,205 Bcf, 359 Bcf (10.1%) less than last year at this time and 378 Bcf (10.5%) below the five-year (2009-13) average. There are four more weeks in the injection season, which traditionally occurs April 1 through October 31. EIA forecasts that the end-of-October working natural gas inventory level will be 3,532 Bcf, which, as of October 7, would require an average injection of 82 Bcf per week through the end of October. EIA’s forecast for the end-of-October inventory levels are below the five-year (2009-13) average peak storage value of 3,851 Bcf.
Total demand was up 5.5% for the week, driven by increases in the industrial and residential sectors. Industrial and residential/commercial consumption rose week-to-week, by 1.3% and 30.1%, respectively, with the residential sector responding to cooler temperatures early in the season. Natural gas used for power generation fell 3.6% this week as most regions experienced lower demand with mild weather. Exports to Mexico declined by 3.4%.

 

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