Distillate Fuel Oil Prices Nearing a Breakout
- Low distillate fuel oil volatility brings cheaper option costs
- Constricting Bollinger Bands invite a price expansion
- East Coast distillate fuel oil stock are high
- Natural gas stocks are 16 per cent greater than last year at this time.
Table covers crude oil and principal products. Other products, including residual fuel oil and “other oils” are not shown, and changes in the stocks of these products are reflected in “Total Petroleum Products.”
Statistics Source: Energy Information Administration “Weekly Petroleum Status Report” available at www.eia.doe.gov
The Matrix
The HO chart since the beginning of July is shown below. The green and red lines are “Bollinger Bands.” They measure volatility in the market. As volatility diminishes, two important things happen.
First, option premiums fall. This is obviously important for dealers wishing to offer maximum price, “cap,” programs.
Point two refers to the situation when Bollinger Bands contract. The contraction becomes a signal for a subsequent expansion and a sharp move in price.
The direction of that expansion cannot be known, but some observers believe prices will move lower in response to very high inventory levels here at home and globally. This is so despite impressive demand in the United States realized because of relatively low prices.
ULSD Daily Chart
Sept. 24, 2015
If interest rates are raised, distillate fuel oil demand could suffer, particularly in Brazil. And South America accounts for about half of U.S. distillate exports.
The Energy Information Administration reports that “Inventories of distillate fuel oil in the U.S. East Coast are higher now than they have been in the previous three years, reaching 59 million barrels on September 18. Most of the recent increase is in the Central Atlantic region, but inventories are also higher in New England and in the Lower Atlantic, compared with previous late-September levels.”
The surplus situation in the United States is being exacerbated by events elsewhere. In Europe, for example, low water on the Rhine River has backed up stock in the Amsterdam, Rotterdam and Antwerp (ARA) port. Modernized refineries in the Middle East are challenging exports from the US Gulf Coast, reducing another outlet for surplus US product.
Wave Count analysis suggests that distillate fuel oil prices are in the final stage of the long decline that began in July around $2.06. Price objectives of $1.30 (basis NYMEX) and even a dollar might be seen.
Supply/Demand Balances
Supply/demand data in the United States for the week ending September 18, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased 2.9 million net barrels during the week ending September 18, 2015.
Builds were reported in stocks of RBOB, fuel ethanol, K-jet fuel, and residual fuel oil. Draws were reported in stocks of distillates, propane, and other oils.
Crude oil supplies in the United States decreased to 454.0 million barrels, a draw of 1.9 million barrels.
Crude oil supplies increased in three of the five PAD Districts. PADD 1 (East Coast) stocks grew 0.7 million barrels, PADD 3 (Gulf Coast) stocks increased 2.8 million barrels, and PADD 4 (Rockies) stocks added 0.1 million barrels.
Crude oil stocks in PADD 2 (Midwest) decreased 3.0 million barrels and PADD 5 (West Coast) stocks fell 2.6 million barrels.
Cushing, Oklahoma inventories decreased to 54.0 million barrels, a draw of 0.5 million barrels.
Domestic crude oil production increased 19,000 barrels daily to 9.136 million barrels per day.
Crude oil imports averaged 7.176 million barrels per day, a daily decrease of 13,000 barrels.
Refineries used 90.9 per cent of capacity, a decrease of 2.2 percentage points from the previous report week.
Crude oil inputs to refineries decreased 310,000 barrels daily; there were 16.203 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 398,000 barrels to 16.382 million barrels daily.
Total petroleum product inventories saw a decrease of 1.0 million barrels. Gasoline stocks grew 1.4 million barrels; total stocks are 218.8 million barrels.
Total product demand increased 1.598 million barrels daily to 20.141 million barrels per day.
Demand for gasoline increased 232,000 barrels per day to 9.215 million barrels daily.
Distillate fuel oil supply decreased 2.1 million barrels. Government data show this is the first draw from distillates storage in eighteen weeks. National demand was reported at 4.322 million barrels per day during the report week.
This was a weekly increase of 840,000 barrels daily.
Propane experienced a decrease of 0.6 million barrels from supply. There are 97.1 million barrels in storage. Current demand is estimated at 1.244 million barrels per day, an increase of 270,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Net storage injection is larger than the five-year average and year-ago. The net injection reported for the storage report week ending September 18 was 106 Bcf, up from 73 Bcf the previous week. This injection compares with the five-year (2010-14) average increase of 83 Bcf for the week and last year’s increase of 96 Bcf. Working gas inventories for the report week totaled 3,440 Bcf, 466 Bcf (16%) higher than last year at this time and 148 Bcf (4%) higher than the five-year average.
Storage inventories in Europe have been filling up at a rapid pace over the summer and currently stand at 2,578 Bcf, according to EIA. The injections between April 1 and September 22 of 1,834 Bcf have been the highest of the 2010-15 period, surpassing the previous 2013 record of 1,625 Bcf in this period. High export volumes from Russia and Norway are expected to continue in the remaining few weeks of the injection season, supported by lower natural gas prices, both spot and contract, which are expected to be sustained at current levels in the next few months.
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.Vol. PH 04 NO. 38
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