Weekly Energy Market Situation—Oct. 25, 2021

The Effect of Bullish Supply/Demand Data Persists

Total oil stocks fell 9.8 million barrels
Futures prices cycling near highs
Markets watch RBOB crack spreads
Natural gas prices remain below highs

Alan Levine—Chairman, Powerhouse
(202) 333-5380

The Matrix

Major indicators of the petroleum market situation produced weekly by the Energy Information Administration came up bullish for the week ended Oct. 15, 2021. Gasoline stocks fell by 5.4 million barrels. Other declines in storage were seen in ULSD which fell 3.9 million barrels. Crude oil inventories declined 400,000 barrels, reflecting small gains in Gulf Coast and West Coast supplies. Supplies of total commercial oil fell 9.8 million barrels, spread throughout the complex.

Demand showed weekly growth of 2.0 million barrels daily. Gains were strongest in gasoline where demand added 440,000 barrels per day and ULSD which recorded demand growth of 346,000 barrels daily. The gains on gasoline could be the result of pleasant weather that encouraged driving. The lesser increase in ULSD may reflect warmer weather and barriers to trucking where supply chain challenges may be inhibiting commercial driving demand.

The bullish supply/demand report was not enough, however, to advance futures prices. The report’s release led to marginal new highs ($84.25) in WTI futures.

Other indicators of the market’s condition may be found in spread relations. Spreads involve the purchase and sale of related commodity contracts.

A few weeks ago, Powerhouse looked at a purchase of February ULSD and a sale of April ULSD. At that time February was about 5.4 cents more expensive than April. At writing, the difference has expanded to about 6.4 cents. One penny is worth $420 per spread.

The logic of this trade is that the market expects a colder winter which could result in winter (February– which expires at the end of January) moving higher and faster than April. The persistent strength in demand adds to the bullishness of the trade.

Our attention now starts to focus on RBOB for next winter and spring. Typically, refiners reduce activity in winter. This allows for extended maintenance. Inevitably, less throughput yields less RBOB and cuts demand for crude oil.

Dealers often find their margins stressed during this time. Some use a gasoline crack spread–the difference between long RBOB and short crude oil–to offset their otherwise reduced first quarter margins. This is a topic Powerhouse will focus on as winter approaches.

Supply/Demand Balances

Supply/demand data in the United States for the week ended October 15, 2021, were released by the Energy Information Administration.

Total commercial stocks of petroleum fell 9.8 million barrels during the week ended October 15, 2021.

Commercial crude oil supplies in the United States decreased by 0.4 million barrels from the previous report week to 426.5 million barrels.

Crude oil inventory changes by PAD District:

PADD 1: UNCH at 8.1 million barrels

PADD 2: Down 2.2 million barrels to 108.5 million barrels

PADD 3: Plus 1.9 million barrels to 238.8 million barrels

PADD 4: Plus 0.2 million barrels to 23.6 million barrels

PADD 5: Down 0.3 million barrels to 47.6 million barrels

Cushing, Oklahoma, inventories were down 2.4 million barrels from the previous report week to 33.2 million barrels.

Domestic crude oil production was down 100,000 barrels per day from the previous report week to 11.3 million barrels daily.

Crude oil imports averaged 5.825 million barrels per day, a daily decrease of 169,000 barrels. Exports increased 546,000 barrels daily to 3.060 million barrels per day.

Refineries used 84.7% of capacity; 2.0 percentage points lower from the previous report week.

Crude oil inputs to refineries decreased 71,000 barrels daily; there were 14.990 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 358,000 barrels daily to 15.357 million barrels daily.

Total petroleum product inventories fell 9.4 million barrels from the previous report week.

Gasoline stocks decreased 5.4 million barrels from the previous report week; total stocks are 217.7 million barrels.

Demand for gasoline rose 449,000 barrels per day to 9.634 million barrels per day.

Total product demand increased 1.957 million barrels daily to 21.832 million barrels per day.

Distillate fuel oil stocks declined 3.9 million barrels from the previous report week; distillate stocks are at 125.4 million barrels. EIA reported national distillate demand at 4.278 million barrels per day during the report week, an increase of 346,000 barrels daily.

Propane stocks increased 1.9 million barrels from the previous report week; propane stocks are at 73.6 million barrels. The report estimated current demand at 1.088 million barrels per day, a decrease of 28,000 barrels daily from the previous report week.

Natural Gas

Futures prices for natural gas topped on Oct. 6, 2021, at $6.47. They lost about a quarter of their value over the next two weeks, falling to $4.82. They have since clawed back enough value to finish last week at $5.28. (This Monday morning saw an opening gap at $5.47 on forecasts for colder weather ahead.)

Prices overseas have shown greater strength. This reflects growth in demand in Asia and Latin America, low natural gas inventories in Europe and outages at LNG plants globally.

The lag in U.S. prices notwithstanding, many observers remain bullish. This is based on expectations of a cold winter and development of a La Nina event. Some suggest a $10 objective.

According to the EIA:

The net injections into storage totaled 92 Bcf for the week ended October 15, compared with the five-year (2016–2020) average net injections of 69 Bcf and last year’s net injections of 49 Bcf during the same week. Working natural gas stocks totaled 3,461 Bcf, which is 151 Bcf lower than the five-year average and 458 Bcf lower than last year at this time.

The average rate of injections into storage is 7% lower than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 6.7 Bcf/d for the remainder of the refill season, the total inventory would be 3,568 Bcf on October 31, which is 151 Bcf lower than the five-year average of 3,719 Bcf for that time of year.

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