Crude Oil Stock Balloon

 

  1. U.S. crude oil supplies rise 7.6 million barrels
  2. Price ideas of “lower for longer” in control
  3. Crude oil market developing a “price band” configuration
  4. Natural gas in storage approaching four Tcf.

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse
 

power1

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

The U.S. Petroleum Balance Sheet for the week ending October 9th showed how powerfully bearish the current slate of refinery turnarounds has become.

Crude oil stocks rose 7.6 million barrels during the week. Product stocks fell 4.3 million barrels during the week, not surprisingly. The report was, nonetheless, overwhelmingly bearish.

There is a global supply glut as well. The International Energy Agency expects demand to fall from a five-year high but major OPEC members will continue to produce near record levels.

WTI crude oil fell to $45.23 after release of the Report. If one thing becomes clearer, it is that the “lower for longer” thesis of lower crude oil prices in the weeks ahead is well on its way to fruition. It may not be too much to say that the crude oil supply situation has driven a stake through the heart of the crude price bulls.

The early October rally that reached $50.92 became an invitation for producers to establish short hedges for the first time since mid-July. WTI crude oil futures dated December, 2016 doubled daily volume in the week ending October 9th compared with the average of the prior four weeks. Industry executives asserted that this was the “biggest wave of hedging since August.”

This represents an emerging truth about crude oil prices in the shale revolution age. A market-determined price band may become the new normal, selling into higher prices and cutting output at lower levels. A rally invites hedging. Hedging, of course, provides countervailing short side selling. Hedging should start somewhere above break-even prices.

Hedging means that the hedged producer needs no further price incentive. The driller can produce oil and gas even in a low price environment, adding to supply. Efficiency adds to the bull’s problems. Breakeven prices have been put at roughly $50. A year ago, breakeven was said to be $70.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ending October 9, 2015 were released by the Energy Information Administration.

Total commercial stocks of petroleum increased 3.3 million net barrels during the week ending October 9, 2015.

Builds were reported in stocks of fuel ethanol, residual fuel oil, and propane. Draws were reported in stocks of RBOB, K-jet fuel, distillates, and other oils.

Crude oil supplies in the United States increased to 468.6 million barrels, a build of 7.6 million barrels.

Crude oil supplies increased in four of the five PAD Districts. PADD 2 (Midwest) crude oil stocks grew 3.0 million barrels, PADD 3 (Gulf Coast) stocks increased 2.4 million barrels, PADD 4 (Rockies) added 0.4 million barrels, and

PADD 5 (West Coast) experienced a build of 2.1 million barrels. PADD 1 (East Coast) stocks declined 0.3 million barrels.

Cushing, Oklahoma inventories increased to 54.2 million barrels, a build of 1.1 million barrels.

Domestic crude oil production decreased 76,000 barrels daily to 9.096 million barrels per day.

Crude oil imports averaged 7.315 million barrels per day, a daily increase of 247,000 barrels.

Refineries used 86.5 per cent of capacity, a decrease of 1.5 percentage points from the previous report week.

Crude oil inputs to refineries decreased 292,000 barrels daily; there were 15.267 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 233,000 barrels to 15.537 million barrels daily.

Total petroleum product inventories saw a decrease of 4.3 million barrels. Gasoline stocks decreased 2.6 million barrels; total stocks are 221.3 million barrels.

Total product demand increased 0.599 million barrels daily to 19.473 million barrels per day.

Demand for gasoline increased 179,000 barrels per day to 9.137 million barrels daily.

Distillate fuel oil supply decreased 1.5 million barrels. National demand was reported at 3.618 million barrels per day during the report week. This was a weekly decrease of 573,000 barrels daily.

Propane experienced an increase of 1.8 million barrels to supply. There are 102.2 million barrels in storage. Current demand is estimated at 0.866 million barrels per day, an increase of 37,000 barrels daily from the previous report week.

 

Natural Gas

According to the EIA:

With a net injection reported for the week ending October 9 of 100 Bcf, inventories rose to 3,733 Bcf, 21 Bcf below the five-year maximum for this time of year. This injection compares with the five-year average increase of 87 Bcf for the week and last year’s increase of 96 Bcf. Working gas inventories for the report week were 447 Bcf (14%) higher than last year at this time and 168 Bcf (5%) higher than the five-year (2010-14) average.

Total supply fell by 0.2% this week, with a 0.9% decrease in dry production leading the decline, according to data from Bentek Energy. Although dry production declined, it is still 2.7% greater than the year-ago level.

Week-over-week consumption rose by 1.1%. Residential/ commercial and industrial consumption fell by 6.5% and 0.8%, respectively, while consumption of natural gas for power generation (power burn) rose 7.5%. Although seasonal demand is relatively low in early fall, power burn has been very high this year; in October, power burn averaged 25.2 Bcf/d, which is 25% more than the average of the previous five years. Several factors have contributed to the rise in power burn, including lower natural gas prices and coal retirements.

Prices reacted bearishly to release of the injection data. November natural gas futures fell to 2.449. Support can be found at $2.40, $2.16 and then $1.90. This level has not been seen since 2002.

 

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