Weekly Energy Market Situation—Crude Oil Fails the Neckline

  1. OPEC agreement still supporting prices
  2. OPEC agreement still very tenuous
  3. Oil from shale has changed the situation
  4. Natural gas breaks support

Al pic 2009_cropped

Alan Levine, Chairman, Powerhouse


The Matrix

Oil markets are still in thrall to OPEC’s announced agreement to limit production. Price continues to flirt with the neckline on the inverted head and shoulders that has been developing on the weekly WTI crude oil chart. A weekly close over $51.30 could introduce a rally leading toward $60, resistance that limited the market through May and June of this year.

A market supported by expectations of cooperation among OPEC members is held by a very thin thread. History tells us that successful output control has been very hard to sustain. OPEC may fancy itself a cartel, but self-interest generally rules the day. The record of OPEC agreements is replete with failures. One analysis points out that “even with an OPEC cut, prices rarely sustained more than 60 – 65% of pre-downturn levels.” And even a true, fully observed, cut in production does not assure that prices will not fall anyway.

The current oil price environment introduces even more uncertainty into the prospects for success of OPEC’s latest sally into price support. Reduction of many government subsidies on fuel has made price more responsive to consumer demand. Moreover, hedging prospective output has become more widely recognized and used. Hedging pre-sells production, allowing production even in falling markets.

The most important difference in today’s environment is the emergence of crude oil from shale as a reliable supply source. Cheaper than drilling in the offshore, more rapidly brought to completion and profitable for some at $40 per barrel, shale oil has become the global marginal crude oil supply. Barriers to cooperation on limiting production remove U.S. production from consideration as part of any producers’ effort to limit supply.

Some observers point to the million-barrel decline in U.S. as evidence that U.S. exploration/production is not immune to global economic forces. The Energy Information Administration’s (EIA’s) supply/demand report for the week ending October 14 showed domestic crude oil produced in the lower 48 states was 7.975 million barrels daily, slightly higher than during the prior week and 630,000 fewer barrels daily compared to last year at this time. This suggests that losses in output have largely ceased.

Supply/Demand Balances

Supply/demand data in the United States for the week ending October 14, 2016, were released by the EIA.

Total commercial stocks of petroleum decreased 3.6 million barrels during the week ending October 14, 2016.

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

Commercial crude oil supplies in the United States decreased to 468.7 million barrels, a draw of 5.2 million barrels.

Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks declined 0.3 million barrels, PADD 2 (Midwest) crude oil stocks fell 3.5 million barrels, PADD 3 (Gulf Coast) stocks decreased 1.5 million barrels and PADD 5 (West Coast) stocks decreased 0.8 million barrels. Crude oil stocks in PADD 4 (Rockies) increased 0.9 million barrels.

Cushing, Oklahoma, inventories decreased 1.6 million barrels to 59.7 million barrels.

Domestic crude oil production increased 14,000 barrels daily to 8.464 million barrels per day.

Crude oil imports averaged 6.907 million barrels per day, a daily decrease of 954,000 barrels. Exports declined 42,000 barrels daily to 439,000 barrels per day.

Refineries used 85% of capacity, a decrease of 0.5 percentage points from the previous report week.

Crude oil inputs to refineries decreased 182,000 barrels daily; there were 15.370 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 83,000 barrels daily to 15.671 million barrels daily.

Total petroleum product inventories saw an increase of 1.6 million barrels from the previous report week.

Gasoline stocks expanded 2.5 million barrels; total stocks are 228.0 million barrels.

Demand for gasoline decreased 466,000 barrels per day to 8.798 million barrels daily.

Total product demand fell 1.021 million barrels daily to 19.716 million barrels per day.

Distillate fuel oil supply decreased 1.2 million barrels; total stocks are 155.7 million barrels. National distillate demand was reported at 3.987 million barrels per day during the report week. This was a weekly decrease of 279,000 barrels daily.

Propane stocks decreased 1.2 million barrels to 102.7 million barrels. Current demand is estimated at 1.305 million barrels per day, an increase of 374,000 barrels daily from the previous report week.

Natural Gas

According to the EIA:

Net injections into storage totaled 77 Bcf, compared with the five-year (2011 – 2015) average net injection of 84 Bcf and last year’s net injections of 87 Bcf during the same week. During the past three weeks, net injections into storage have totaled 236 Bcf—the highest three-week tally of the 2016 refill season. The 2016 refill season remains on pace to be the only refill season, aside from 2012, not to post a single week that exceeds 100 Bcf—a threshold that typically is exceeded at least two times during the refill season. Working gas stocks total 3,836 Bcf, which is 185 Bcf more than the five-year average and 46 Bcf more than last year at this time.

The build of 77 Bcf was the smallest for the report week since 2012. It led to a price decline after release of the data but did not change the generally bullish pattern of the price charts.

On the other hand, we count a five-wave advance from last March when December futures bottomed at $2.37. December futures prices reached $3.556 on October 14. Since then, prices have softened and prices have broken support at $3.35. This accentuates the validity of the completed five-wave rally and increases the uncertainty facing natural gas prices going forward.

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Powerhouse is a registered affiliate of Coquest, Inc.

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