Jan. 21, 2014

Weather has been the story of energy prices in recent weeks. Heating degree days have reached 220 more than last year as of January 11th

The demand for distillate fuel oil expanded during the week ending January 10th. Cold weather shows in the 8.8 cent premium held by February ULSD futures over March.

Cold weather had a significant impact on domestic supply/demand balances reported by EIA. Gasoline demand fell to eight million barrels for the last report week.

Working gas in storage was 2,530 Bcf as of Friday, January 10, 2014, according to EIA estimates.  This represents a net decline of 287 Bcf from the previous week.

 Al pic 2009_cropped

Alan Levine
Chairman, Powerhouse


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 

The Matrix

Weather has been the story of oil prices in recent weeks.  NOAA’s Climate Prediction Center reports for the year starting July 1, 2013 US cumulative heating degree days reached 2,104 as of January 11, 2014. This is 40 HDDs more than normal and a whopping 220 HDDs more than last year at this time.

The current excess was especially impressive in New England and the Central States. 357 more cumulative HDDs than last year were generated in New England. And in the East North and West North Central states, 437 and 466 HDDs respectively were seen.

The demand for distillate fuel oil expanded during the week ending January 10th. Cold weather showed in the seven cent premium held by February ULSD futures over March.  A February premium over March is not uncommon, but this expanded difference indicates tightening supplies, reflected also in a wider basis.

Changes in the economics of crude oil production and refining are changing the ways in which we are thinking about petroleum supply.  The WTI forward price curve has shifted from carry to backwardation.   February WTI futures are trading at a $19 premium over December 2019.   This is a bullish configuration, notwithstanding that the US is growing its production.  It suggests that concerns for events in MENA and Nigeria could offset the bearish US outlook.

Last week, however, saw a bullish run for spot WTI. On Tuesday, January 14th, February WTI traded at a discount of 25 cents to March. By Friday, January 17th, the discount had fallen to 9 cents.

The strength in crude oil is likely to be short lived. Production had been interrupted in the Gulf of Mexico and in the Dakotas. Both locations are now coming back into operation.  Unusually high rates of refinery operations on the Gulf Coast are taking 8.3 million barrels per day to stills. Last year, Gulf Coast facilities used 7.8 million barrels daily, a more typical level of use.

US Supply/Demand Balances

Cold weather has had a significant impact on domestic supply demand balances. Gasoline demand, for example, came in at 8.021 million barrels daily for the week ending January 10, 2014 according to the Energy Information Administration. This was confirmed by an increase in gasoline inventories of 6.2 million barrels. More than half of the gain was on the East Coast – recently beset with cold and ice. Propane stocks lost 3.8 million barrels during the report week.

Another unusual figure was a loss of 7.7 million barrels of crude oil stocks. The decline may reflect substitution of domestic crude oil for imports. Crude oil imports fell more than one million barrels daily during the report week. The US imported 6.9 million barrels daily. A measure of the significance of this decline is that just a year ago at this time imports were greater than eight million barrels per day. Domestic crude oil production moved higher, reaching 8,159 million barrels daily.

Distillate fuel oil demand rose dramatically. It rose more than 700,000 barrels daily to 3.7 million barrels per day.

Natural Gas

According to the EIA:

Working gas in storage was 2,530 Bcf as of Friday, January 10, 2014, according to EIA estimates. This represents a net decline of 287 Bcf from the previous week. Stocks were 659 Bcf less than last year at this time and 443 Bcf below the 5-year average of 2,973 Bcf.

The weather outlook is likely to continue to drive natural gas prices for the short term. This week’s weather is expected to return to polar vortex cold. The weather is likely to be frigid by mid-week for the Midwest and Eastern States. There is some concern that coastal storms may lead to snow in the East, but more importantly, much colder air is being folded in behind it. Chicago will possibly reach zero and the Northeast single-digits at the peak of the cold.

As noted, storage lags the five year average by 443 Bcf. And as fresh cold weather arrives, the shortfall will have to be made up by production. And recent experience with crude oil production suggests the possibility that cold weather could interfere with output. The implications for price are bullish.

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