Oil Markets Send a Mixed Message
- Bearish impacts include Greek debt and growing rig count
- Bullish elements include growth in demand for crude oil and gasoline
- ULSD price charts turning bullish
- Natural gas production expected to grow at 5.7 per cent in 2015:EIA
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
Crude oil prices broke out of the six dollar range in which they had traded since late April. The oil markets returned from an extended Independence Day holiday to sharp declines in all petroleum liquids futures. WTI lost $4.40 on that Monday, a loss of 7.6 per cent. ULSD prices fell about the same proportion, losing thirteen cents on the day. RBOB resisted the loss to some degree, giving up 5.4 per cent of value.
Much of this was a reaction to long-simmering problems that have been in the news for many months. Greece moved closer to default. The Iranian embargo appeared ready for a bearish resolution. OPEC output was seen as rising in response to production growth in the United States. As long-term issues, these should not have induced so large a decline.
At the same time, new elements appeared. These included an increase in drill rigs and a more bearish tone from the investment community. Even more stunning was a collapse of the Chinese stock market.
The Chinese equity market had dropped by about a third since mid-June. Efforts to stabilize price did little to stem the decline. An economic slowdown should lead to lower demand growth. One observer questioned the strength of the link between the stock market and fundamentals, citing political risk as the more dangerous for China’s economic stability. He noted, “There is a clear disconnect between economic fundamentals and the stock market: this disconnect was just as palpable when the market was making dramatic gains as it is in the current bearish sentiment.”
The weekly rig count produced a bearish surprise too. The number of rigs drilling for oil rose for the first time since December 5, 2014. There were twelve more rigs at work during the week ending June 26th. This was the first gain in 29 consecutive weeks. Goldman Sachs noted, “Not only did $60 per barrel oil, strong high yield and equity energy markets create an increase in U.S. drilling last week but the market structure of the New Oil Order has generated incentives for low-cost producers such as core OPEC and Russia to ramp up current and future production.” The bank renewed its forecast for lower oil prices.
All this ostensibly bearish news may have caused the Monday sell-off, but remarkably there has been little follow through. WTI crude oil fell to $50.58 at its low. By Thursday, July 9, prices had recovered to over $53.50. And ULSD added nearly nine cents over the $1.67 low. Even more impressive was RBOB. It bottomed on Tuesday at $1.9074. By Thursday, RBOB reached $2.0429 – nearly recovering the entire Monday loss.
The recovery appears to recognize dramatic gains in demand. U.S. refineries continue to operate at high rates. New crude oil supplies from Iran are likely to come slowly to market if an end to the embargo is seen. And domestic gasoline demand continues to push at historical highs.
Distillate fuel oil stocks in the United States continue to build. And demand is moving lower. At the same time, however, the technical condition of the ULSD price chart is turning bullish. Prices recovered and divergence, signaling a move higher, is starting to assert itself. A summer bottom for distillates is a long time feature of oil markets.
Supply/Demand Balances
Supply/demand data in the United States for the week ending July 3, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum increased 10.6 million net barrels during the week ending July 3, 2015.
Builds were reported in stocks of every oil category: crude oil, K-jet, distillates, residual fuel oil, propane, other oils, ethanol, and RBOB.
Crude oil supplies in the United States increased to 465.8 million barrels, a build of 0.4 million barrels.
Crude oil supplies increased in two of the five PAD Districts. PADD 1 (East Coast) crude oil stocks experienced an increase of 0.3 million barrels. PAD District 5 (West Coast) storage grew 1.2 million barrels.
PADD 2 (Midwest) stocks fell 0.6 million barrels. PADD 3 (Gulf Coast) stocks decreased 0.4 million barrels. PADD 4 (Rockies) crude oil stocks declined 0.2 million barrels.
Cushing, Oklahoma inventories decreased to 56.7 million barrels, a decrease of 0.7 million barrels.
Domestic crude oil production increased 9,000 barrels daily to 9.604 million barrels per day. Gains in Alaskan output were greater than lower 48 reductions.
Crude oil imports averaged 7.316 million barrels per day, a daily decrease of 0.197 million barrels.
Refineries used 94.7 per cent of capacity, a decrease of 0.3 percentage points from the previous week.
Crude oil inputs to refineries increased 65,000 barrels daily; there were 16.596 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased 47,000 barrels per day to 16.929 million barrels daily.
Total petroleum product inventories saw an increase of 10.2 million barrels. Gasoline stocks rose 1.2 million barrels; total stocks are 218.0 million barrels.
Total product demand fell 0.484 million barrels daily to 19.246 million barrels per day.
Demand for gasoline decreased 198,000 barrels per day to 9.532 million barrels daily.
Distillate fuel oil supply gained 1.6 million barrels. Stocks are 137.5 million barrels. National demand was reported at 3.794 million barrels per day during the report week. This was a weekly decrease of 0.110 million barrels daily.
Propane added 2.2 million barrels to supply. There are 85.7 million barrels in storage. Current demand is estimated at 0.793 million barrels per day, a decline of 97,000 barrels daily from the previous report week.
Natural Gas
According to the EIA: Working gas in storage was 2,668 Bcf as of Friday, July 3, 2015, according to EIA estimates. This represents a net increase of 91 Bcf from the previous week. Stocks were 659 Bcf higher than last year at this time and 45 Bcf above the 5-year average of 2,623 Bcf.
The Energy Information Administration expects natural gas production to grow at 5.7 per cent for the balance of 2015. The agency expects the gains to come about because of greater drilling efficiency and strong industrial and power demand.
This is inconsistent with a recent report estimating a decline in natural gas drilling rigs during the week ending June 26th. This was the largest decline in 13 weeks. Some of the decline might reflect reclassification to oil from gas or reemployment to oil-bearing formations.
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