Weekly Energy Market Situation-October 4, 2022

Low Distillate Fuel Oil Inventories Heighten Price Uncertainty

Thirty-two days’ supply of distillate fuel oil are available
Winter expected to be stormy and cold says the Farmer’s Almanac
Product exports are another draw on supply
EIA expects 3.4 Tcf of natural gas in storage as injection period ends.

Sincerely,

Alan Levine, Chairman

Powerhouse

(202) 333-5380

The Matrix

Petroleum liquids start October with distressingly low inventories. Some analysts use Days’ Supply as a measure of adequate supply as winter approaches. The situation is uncomfortably thin by that measure. Crude oil supply is enough for only 27 days of refinery operation. The lowest level over the past five years has been 22 days. The currently slightly elevated level probably reflects infusions from the Strategic Petroleum Reserve.

Stocks of distillate fuels remain well below even the minimum of the past five-years. There are now 114 million barrels now in storage, nearly 15 million barrels lower than average for this time of year. This translates into 32 days’ supply, about the same as the lowest level of availability over the past five years.

Weather expectations provided by the Farmer’s Almanac (Not the same as the Old Farmer’s Almanac) call for a stormy and cold December nationally. The Almanac gives detail for the eastern half of the nation, predicting an active storm pattern for the East. The storm track should run from the western Gulf of Mexico, northeast across Virginia, targeting interior New York State and New England.

Most of the Southeast is likely to experience cold rains and a wintry mix of wet snow, sleet, freezing rain, and chilly temperatures. The Almanac also calls for more snow north of the track and, at times “a lot of it,” particularly in the Ohio Valley and the Great Lakes.

Another new element in the mix of uncertainty is the proliferation of product exports this year. EIA estimates U.S. product exports for the first half of 2022 at nearly six million barrels daily. This is an expansion over last year for this period of 11%. It is also the largest volume of exports since 1973. Distillate fuel oils and propane were most of the exports.

There is a raft of additional factors influencing supply/demand balances this winter. There is tension between efforts to tame inflation and continuing high employment adding money into the economy. Geopolitical issues like the shift of demand for transportation fuels from fossil sources to renewables and electric, the possibility that even Saudi Arabia is reaching its production limits, and the implications of further failure for Russia in the Ukraine are stark reminders of how uncertain is the energy future and its price and its cost.

Supply/Demand Balances

Supply/demand data in the United States for the week ended September 23, 2022, were released by the Energy Information Administration.

Total commercial stocks of petroleum fell 8.9 million barrels during the week ended September 23, 2022.

Commercial crude oil supplies in the United States decreased by 0.2 million barrels from the previous report week to 430.6 million barrels.

Crude oil inventory changes by PAD District:
PADD 1: Down 0.3 million barrels to 8.2 million barrels
PADD 2: Plus 1.3 million barrels to 108.2 million barrels
PADD 3: Down 2.9 million barrels to 241.8 million barrels
PADD 4: Plus 0.6 million barrels to 23.7 million barrels
PADD 5: Plus 1.1 million barrels to 48.6 million barrels

Cushing, Oklahoma inventories were up 0.7 million barrels from the previous report week to 25.7 million barrels.

Domestic crude oil production was down 100,000 barrels per day from the previous report week at 12.0 million barrels daily.

Crude oil imports averaged 6.449 million barrels per day, a daily decrease of 498,000 barrels. Exports increased 1,106,000 barrels daily to 4.646 million barrels per day.

Refineries used 90.6% of capacity; 3 percentage points lower than the previous report week.

Crude oil inputs to refineries decreased 604,000 barrels daily; there were 15.751 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 538,000 barrels daily to 16.255 million barrels daily.

Total petroleum product inventories dropped by 8.7 million barrels from the previous report week, falling to 800.4 million barrels.

Total product demand increased 1,832,000 barrels daily to 20.770 million barrels per day.

Gasoline stocks decreased 2.4 million barrels from the previous report week; total stocks are 212.2 million barrels.

Demand for gasoline increased 504,000 barrels per day to 8.825 million barrels per day.

Distillate fuel oil stocks decreased 2.9 million barrels from the previous report week; distillate stocks are at 114.4 million barrels. EIA reported national distillate demand at 4.178 million barrels per day during the report week, an increase of 768,000 barrels daily.

Propane stocks increased by 1.6 million barrels from the previous report week to 82.8 million barrels. The report estimated current demand at 918,000 barrels per day, an increase of 66,000 barrels daily from the previous report week.

Natural Gas

Demand destruction accompanies hurricanes, and the situation around H. Ian was no different. Natural gas spot futures fell as H. Ian made landfall on Florida’s west coast. Prices reached $6.456 last Wednesday, September 26 before reversing and ended the day higher.

Recent market strength was emphasized by suggestions of sabotage on Nord Stream I and II pipelines. The lines carry natural gas from Russia to the EU and their unavailability heightens concerns for the European winter soon to arrive.

Separately, an analysis of U.S. LNG exports by the Chicago Mercantile Exchange shows that markets have already begun to move away from Russian natural gas. The first eight months of 2022 showed U.S. exports to Europe doubling to 67%. Demand for LNG in China fell by one-fifth, reflecting Covid-induced lockdowns and the country’s emphasis on domestic coal and natural gas.

Europe has engaged in a staggeringly expensive campaign to fill natural gas storage before winter demand arrives.

Presently, EU storage is more than 89% full and UK storage is more than 94% full. A few weeks of injection season still remain. In June, the European Council set a target of reaching 80% by November 1st.

It is important to note that natural gas storage is not intended to fill the entire supply gap caused by an embargo or blockade. Rather it is designed to buffer seasonal variations in consumption due to an exceptionally cold weather.

The U.S. natural gas injection season is soon to end. EIA notes that “if the rate of injections into storage matched the five-year average of 9.5 Bcf/d for the remainder of the refill season, the total inventory would be 3,339 Bcf on October 31, which is 306 Bcf lower than the five-year average of 3,645 Bcf for that time of year.”

According to the EIA:

Net [natural gas] injections into storage totaled 103 Bcf for the week ended September 23, compared with the five-year (2017–2021) average net injections of 77 Bcf and last year’s net injections of 86 Bcf during the same week. Working natural gas stocks totaled 2,977 Bcf, which is 306 Bcf (9%) lower than the five-year average and 180 Bcf (6%) lower than last year at this time.

The average rate of injections into storage is 2% 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 9.5 Bcf/d for the remainder of the refill season, the total inventory would be 3,339 Bcf on October 31, which is 306 Bcf lower than the five-year average of 3,645 Bcf for that time of year.

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