Oil Markets Looking For Direction
- U.S. crude oil stocks are lower; so is demand
- OPEC tries to return to production discipline
- Resistance at $51.50 for WTI crude oil
- Natural gas “rebalancing” pushed further into the future
The Matrix
Oil markets are looking for a direction. Recent declines in U.S. crude oil stocks have not materially changed the crude oil and products oversupply situation and seasonally ebbing product demand has not been enough for prices to break support.
Overseas, OPEC is creating market movement. Most recently the group apparently agreed to a production cut of one million barrels daily. Details are sketchy. Production allocations will not be made until November. Iran, Nigeria and Libya will be allowed to produce “at maximum levels that make sense.”
Like other OPEC deals over the years, internal competition among its members creates its own uncertainties. Iraq, for example, has become OPEC’s second largest producer. It is arguing that its recent, higher, output levels should entitle it to a larger share of OPEC’s production going so far as to challenge the data sources used by OPEC. Iraq has not heretofore been so assertive. A surging Iraq is a new factor in the OPEC calculus. It has yet to be tested.
Installation of a quota system represents a significant reversal of Saudi Arabia’s recent policy of protecting market share at all costs. The previous quota system was not well followed. This was why the Saudi’s abandoned the system in the first place. And the deal’s timing is suspect as well. The fall is a time when production falls seasonally anyway.
Crude oil prices rallied on the news, but skepticism has acted as a brake on the rally. The reverse head and shoulders formation discussed in the Energy Market Situation of September 19 remains in play.
As noted, “If WTI prices break above the “neckline,” running at $51.33 [late in September], a further rally could ensue. And that rally could reach $77—doubling the $25.24 seen from the head to the neckline.
Supply/Demand Balances
Supply/demand data in the United States for the week ending September 23, 2016 were released by the Energy Information Administration.
Total commercial stocks of petroleum were unchanged during the week ending September 23, 2016.
Builds were reported in stocks of gasoline, fuel ethanol, K-jet fuel, residual oil, and propane. Draws took place in stocks of distillates and other oils.
Commercial crude oil supplies in the United States decreased to 502.7 million barrels, a draw of 1.9 million barrels.
Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks declined 3.3 million barrels, PADD 2 (Midwest) crude oil stocks decreased 0.4 million barrels, PADD 3 (Gulf Coast) stocks fell 0.7 million barrels, and PADD 4 (Rockies) stocks declined 0.1 million barrels. PADD 5 (West Coast) crude oil stocks experienced a build of 2.4 million barrels.
Cushing, Oklahoma inventories decreased 600,000 barrels to 62.1 million barrels.
Domestic crude oil production decreased 15,000 barrels daily to 8.497 million barrels per day.
Crude oil imports averaged 7.835 million barrels per day, a daily decrease of 474,000 barrels. Exports fell 81,000 barrels daily to 507,000 barrels per day.
Refineries used 90.1 per cent of capacity, a decrease of 1.9 percentage points from the previous report week.
Crude oil inputs to refineries decreased 253,000 barrels daily; there were 16.334 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased 357,000 barrels daily to 16.607 million barrels daily.
Total petroleum product inventories saw an increase of 1.9 million barrels from the previous report week.
Gasoline stocks increased 2.0 million barrels; total stocks are 227.2 million barrels.
Demand for gasoline decreased 770,000 barrels per day to 8.880 million barrels daily.
Total product demand decreased 205,000 barrels daily to 19.226 million barrels per day.
Distillate fuel oil supply decreased 1.9 million barrels; total stocks are 163.1 million barrels. National distillate demand was reported at 3.772 million barrels per day during the report week. This was a weekly increase of 340,000 barrels daily.
Propane stocks increased 1.5 million barrels to 103.3 million barrels. Current demand is estimated at 972,000 barrels per day, an increase of 297,000 barrels daily from the previous report week.
Natural Gas
According to the Energy Information Administration:
Injections to storage continue at slower-than-normal rate. Net injections into storage totaled 49 Bcf, compared with the five-year (2011–15) average net injection of 97 Bcf and last year’s net injections of 99 Bcf during the same week. Working gas stocks total 3,600 Bcf, which is 220 Bcf above the five-year average and 90 Bcf above last year at this time. When the refill season began on April 1, working gas stocks were 874 Bcf above the five-year average.
Natural gas prices have traded in a tight range since the beginning of July when significant resistance was established just below $3.00. That resistance level is now the dominant feature on the price chart. Injections into underground storage have lagged recent averages and natural gas futures prices typically show seasonal strength from October through December. A breakout above the $3.00 resistance would lead to a target price of $3.40 basis the front month contract.
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