“Market Balancing” Dominates News; Reality, Not So Much
- Russia and Saudi Arabia sign “oil cooperation” accord
- Iran nears pre-sanction production
- U.S. crude oil inventories cut 14.5 million barrels
- Heightened power burn does not rally natural gas prices
The Matrix
“Market Rebalancing” took a step forward and a few steps backwards too last week. An agreement was reached between Russia and Saudi Arabia pledging cooperation in oil markets. At the same time, the parties did not announce imposition of any limitations on output as part of the deal.
The agreement was seen as a step towards a “strategic energy partnership.” Nonetheless the accord could be a precursor to major changes in the geopolitical alignment in the Middle East. Both countries have been involved in a proxy war in Syria. Russia has also aligned itself with Iran, itself seeking to establish itself as a major regional competitor to Saudi Arabia.
Iran is a fly in the ointment – there are others — to completing any agreement to freeze production. The challenge for OPEC has been to accommodate Iran’s limitations on exporting crude oil under sanctions. Iran insists it must produce at pre-sanction levels before agreeing to a freeze on output. That level, around four million barrels daily — is apparently in sight, opening the door to a broader agreement, as suggested by the Russo-Saudi agreement.
It is interesting to note that there has been little progress in actually implementing a freeze. International oil meetings are set for late September. OPEC members are thought likely to discuss new controls at that time. If that proves unproductive, OPEC has a regular meeting in November. Cutting through the official statements, Saudi Arabia is apparently satisfied to produce more at current prices and, with most OPEC producers and Russia now operating near maximum, reap the benefit of its expansible crude oil reserve position.
Iraq is another OPEC member with expansion possibilities. Iraqi oil officials expect production and exports to grow steadily from current levels in 2017. Recent data put August production at 4.638 million barrels per day. Iraq supports a freeze.
The history of OPEC production control shows spotty adherence at best. Saudi Arabia generally took the bulk of any cut. The Kingdom’s reluctance to do that again was one reason for its new, market-based output policy after all. Saudi Arabia’s willingness to produce at greater levels may be the stick to keep lesser producers in line this time.
Supply/Demand Balances
Supply/demand data in the United States for the week ending September 2, 2016 were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased 13.7 million net barrels during the week ending September 02, 2016.
Draws were reported in stocks of gasoline, fuel ethanol, and residual fuel oil. Builds were reported in stocks of K-jet fuel, distillates, propane, and other oils.
Commercial crude oil supplies in the United States decreased to 511.4 million barrels, a draw of 14.5 million barrels.
Crude oil supplies decreased in all five PAD Districts. PAD District 1 (East Coast) crude oil stocks fell 3.1 million barrels, PADD 2 (Midwest) stocks declined 0.6 million barrels, PADD 3 (Gulf Coast) stocks decreased 8.8 million barrels, PADD 4 (Rockies) fell 1.0 million barrels, and PADD 5 (West Coast) stocks decreased 1.1 million barrels.
Cushing, Oklahoma inventories decreased 0.5 million barrels to 63.4 million barrels.
Domestic crude oil production decreased 30,000 barrels daily to 8.458 million barrels per day.
Crude oil imports averaged 7.069 million barrels per day, a daily decrease of 1.848 million barrels.
Refineries used 93.7 per cent of capacity, an increase of 0.9 percentage points from the previous report week.
Crude oil inputs to refineries increased 315,000 barrels daily; there were 16.930 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, increased 273,000 barrels daily to 17.280 million barrels daily.
Total petroleum product inventories saw an increase of 0.8 million barrels from the previous report week.
Gasoline stocks decreased 4.2 million barrels; total stocks are 227.8 million barrels.
Demand for gasoline increased 84,000 barrels per day to 9.595 million barrels daily.
Total product demand increased 1.158 million barrels daily to 21.310 million barrels per day.
Distillate fuel oil supply increased 3.4 million barrels; total stocks are 158.1 million barrels. National distillate demand was reported at 3.688 million barrels per day during the report week. This was a weekly decrease of 150,000 barrels daily.
Propane stocks increased 0.6 million barrels to 99.1 million barrels. Current demand is estimated at 1.228 million barrels per day, an increase of 442,000 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 36 Bcf, compared with the five-year (2011-15) average net injection of 64 Bcf and last year’s net injections of 78 Bcf during the same week. Working gas stocks total 3,437 Bcf, 306 Bcf above the five-year average and 196 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.
The rate of injection has been slowing since May. Nonetheless, inventories continue to exceed comparable supply last year and over the average of the past five years.
The Climate Prediction Center reports Cooling Degree Days for 2016 through September 10 exceeded last year by 6 per cent and by 22 per cent versus the long-term normal. Prices have not reacted directionally. Nearby natural gas futures prices have ranged between $2.55 and $2.93 since mid-June. They are now trading around the center of that range, despite “the current high levels of power burn follow consumption for power over the summer.”
Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.
Powerhouse is a registered affiliate of Coquest, Inc.
Was this helpful? We’d like your feedback.
Please respond to [email protected]
Copyright © 2016 Powerhouse, All rights reserved.
