Year-end Tax Selling Dents Crude Oil Stocks
- Gulf Coast crude oil stocks fall 7.9 million barrels
- Refinery use falls– bullish for products
- El Nino may have peaked
- Natural gas breaks two bucks and rebounds
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
Oil inventories fell 5.3 million barrels in the most recent EIA supply report. This was largely the result of a decline in crude oil supplies of 5.9 million barrels, and this drop was largely the result of a 7.9 million barrel fall in Gulf Coast stocks. Year-end declines in stocks are not uncommon, reflecting, as they do, tax selling in Texas and Louisiana. The data show no change in Gulf Coast crude oil inputs to refineries for the report week supporting the tax-selling explanation.
Markets reacted bullishly, with WTI crude oil reaching $37.78 after release of the data. Nonetheless, oil supplies remain very elevated. Refinery use fell during the report week. Declines were seen particularly in the Midwest and on the West Coast. Both PAD regions have been experiencing refinery outages which are bullish for products. Moreover, refinery turnarounds are expected to begin earlier than usual, adding to interest in buying crack spreads.
Overall, fundamentals remain bearish. The effects of lower oil prices have harmed even the richest producer nations, forcing currency revaluations, asset sales and issuance of debt. Nonetheless, OPEC has shown little sign of interest in cutting output to support price. In fact, OPEC has raised its global supply forecasts for tight oil. The organization expects its market share to shrink by 2020.
Shale oil output has proven to be more buoyant in the face of lower prices than earlier thought. This must raise questions on the effectiveness of the OPEC strategy to allow prices to fall forcing competitive producers from the market. EIA reported that U.S. production of crude oil remains over nine million barrels daily.
It’s too late to save this winter, but there are signs that the El Nino raising havoc with this winter’s weather may have peaked and will temper through the first six months of 2016 as sea surface temperatures in the eastern Pacific Ocean cool. By the start of December, this year’s El Niño—the strongest since 1997-1998—had caused sea surface temperatures to rise by more than 3.6 degrees Fahrenheit in places. El Nino’s counter, the La Nina, could soon take its place Niña occurs when easterly trade winds strengthen. That cools water across the central and eastern Pacific Ocean, which in turn can upend weather around the world. The severity of the phenomenon is measured by ocean temperatures and changes in wind patterns. It typically brings drier-than-usual weather to some states in the U.S.
There remains no way to anticipate whether a La Niña event will occur or how severe the impact will be. However, La Niña events have followed 11 of the last 15 El Niño events, according to the Japan Meteorological Agency. The La Niña that lasted from 1998 through to 2000 caused colder-than-normal winters in the U.S. and Canada, sending prices of natural gas higher, according to CME Group.
Supply/Demand Balances
Supply/demand data in the United States for the week ending December 18, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased 5.3 million net barrels during the week ending December 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 484.8 million barrels, a draw of 5.9 million barrels.
Crude oil supplies increased in four of the five PADD Districts. PADD 1 (East Coast) crude oil stocks increased 0.1 million barrels, PADD 2 (Midwest) stocks grew 1.3 million barrels, PADD 4 (Rockies) stocks rose 0.3 million barrels, and crude oil stock in PADD 5 (West Coast) experienced a build of 0.2 million barrels. PADD 3 (Gulf Coast) crude oil stocks declined 7.9 million barrels.
Cushing, Oklahoma inventories increased 2.0 million barrels to 62.1.
Domestic crude oil production increased 3,000 barrels daily to 9.179 million barrels per day.
Crude oil imports averaged 7.326 million barrels per day, a daily decrease of 986,000 barrels.
Refineries used 91.3 per cent of capacity, a decrease of 0.6 percentage points from the previous report week.
Crude oil inputs to refineries decreased 143,000 barrels daily; there were 16.468 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell, 123,000 barrels to 16.540 million barrels daily.
Total petroleum product inventories saw an increase of 0.6 million barrels from the previous report week. Gasoline stocks increased 1.1 million barrels; total stocks are 220.5 million barrels.
Total product demand decreased 452,000 barrels daily to 19.785 million barrels per day.
Demand for gasoline decreased 35,000 barrels per day to 9.185 million barrels daily.
Distillate fuel oil supply decreased 0.7 million barrels. National demand was reported at 3.995 million barrels per day during the report week. This was a weekly increase of 475,000 barrels daily.
Propane stocks decreased 1.3 million barrels to 97.6 million barrels. Current demand is estimated at 1.326 million barrels per day, an increase of 1,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working gas in storage was 3,814 Bcf as of Friday, December 18, 2015, according to EIA estimates. This represents a net decline of 32 Bcf from the previous week. Stocks were 561 Bcf higher than last year at this time and 411 Bcf above the five-year average of 3,403 Bcf. At 3,814 Bcf, total working gas is above the five-year historical range.
Natural gas futures dipped to $1.684 on Friday, December 18th. This was a price not seen since the earliest days of the contract. Early 1999 saw lows of $1.62. Current prices reflect, of course, far fewer Heating Degree Days than normal and continuing high levels of production notwithstanding low price and soft demand. (The Climate Prediction Center of NOAA estimates HDDs for the United States to be 23 per cent lower than normal. This is for the year starting July 1, 2015.)
In the way of futures contracts, however, prices have since recovered. They have gained the two dollar level as trading activity slows during the year-end period. Resistance can be seen at $2.305, last seen on November 27.
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.
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