Current State of Crude Oil Storage Economics in the US – March 3, 2015

The following table highlights the current estimated storage economics for several key US crude oils and Canadian heavy crude. The calculations were based on yesterday’s (3/2) closing prices. Some of the main assumptions used in the calculations:

  • The analysis uses $0.65/bbl per month storage costs. Storage costs have been talked at as high as $1/bbl in the market last week but I have not confirmed that.
  • For West Canadian Select storage in Cushing I used the Flanagan South Pipeline option of free storage for the 1st six months and then $1/bbl thereafter (heavy crude oil needs heat) plus a $0.25/bbl re-entry fee back into the pipeline. For WCS storage in the Gulf I assumed $1/bbl throughout the storage period.
  • Cost of Money – 1 year Libor rate – 0.67%

March3-1

The combination of storage costs starting to increase as each layer of available storage gets filled coupled with the forward curve contango narrowing yesterday resulted in the economics of storing crude oil in the US becoming less economical compared to the last month or so. Some of the main conclusions for the analysis:

  • I did not include any international crudes as the contango for Brent is just not wide enough and the cost of floating storage is too high to economically justify entering into new longer term storage trades.
  • Storing WCS in Cushing as part of the Flanagan South Pipeline option is clearly the most economical storage trade. This has already resulted in a fair amount of Canadian crude being put into storage trades in Cushing already.
  • Storing WTI at Midland and then moving it to Cushing for delivery against the Nymex contract is more economical than storing WTI in Cushing. The reason is the WTI Midland discount to WTI Cushing is enough to offset the pipeline cost of moving WTI from Midland to Cushing (to the extent that pipeline capacity is available).
  • Storing other grades like LLS, Mars and WCS in the Gulf are marginal trades at best based on the current assumptions used. Oil is being stored in the Gulf. Since the end of last year over 15 million barrels of crude oil has already been stored in the Gulf. Part of that is likely operational and some is probably the result of storage trades that may have been entered into when the economics were a bit better for some of the aforementioned grades.
  • Clearly storage capacity is getting bid up as storage facilities also try to take advantage of an opportunity. As storage cost rise the economics of storing most US grades will become marginal and/or unprofitable.
  • As storage capacity continues to fill the WTI forward curve should widen. It normally does when oil is oversupplied. If it does not either imports will have to be reduced further or producers could face having to shut in oil if demand declines due to storage economics becoming unprofitable. I don’t think that will happen I still thing the forward curve will widen further.

Energy Market Analysis – Monday Morning March 2, 2015

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Quote of the Day

“Do not wait to strike till the iron is hot; but make it hot by striking.” William Butler Yeats

Energy Overnight – Complex Lower –  The oils are trading lower so far this morning on a round of profit taking. Friday the oil complex staged an end of the month rally on Friday with the entire complex ending the session in positive territory. With the exception of WTI the complex ended with a weekly and monthly gain suggesting that the market views the US as ground zero for the crude oil surplus. Certainly the meteoric growth in US crude oil inventories support this view.

The Expectation Rally is now a month old as highlighted. Brent is leading the rally higher with a 27.4 percent gain since Jan 30th with WTI higher by only about 39 percent of the Brent gain. The 12 month forward curve contango has widened during the month long rally while the Brent contango for the same timeframe has actually narrowed strongly.

The fundamentals have been bearish throughout the rally with the exception of the US oil rig count which has declined throughout the rally. That said for the second week in a row the rate of decline in US oil rigs narrowed suggesting that possibly a bottoming in rigs could be closer than originally thought by the market.

Both RBOB and HO were the best performers for the month of January on a late winter arctic cold blast along the eastern half of the US coupled with a plethora of refinery issues along both coasts of the US and in Venezuela. Brent continued to recover while WTI recovered some of its early month losses but not enough to end the month with a gain. The Brent/WTI spread continues to widen strongly as US crude oil stocks in Cushing and elsewhere in the US have reached record high levels for this time of the year. As long as US crude oil stocks continue to grow the spread is likely to continue to widen.

On the other end of the energy complex… natural gas put in a negative month adding to the yearly decline from 2014.  Although there has been a cold blast of late it has not been enough to offset the warmer than normal weather experienced for the first 60 percent of the winter. Nat Gas supply has continued to be robust in 2015 with no sign that there will be any supply issues in the medium to even longer term perspective.

For all of the talk of the US dollar completely falling out of bed in 2014 the US dollar index was strongly higher for the month after a strong performance in 2014. The announcement of the ECB initiating a QE program for the EU sent the euro into a tailspin but also sent the European bourses to the top of the global equity leader board.

We are maintaining our oil view and bias at neutral as the recovery rally continued last week but not for WTI. The market remains in a volatile pattern in the short term. Going forward we still expect the market to retest the lows made several weeks ago.

We are adjusting our Nat Gas view and bias back to cautiously bearish as the cold spell engulfing the East Coast seems to be coming toward an end over the next week or two.

March2-1

March2-2

Market Sentiment:

March2-3

Market Analysis:

Oils

Fundamentals/Technicals – On a weekly basis the reality versus expectation battle continued throughout last week and resulted in WTI declining with the rest of the complex adding value for the week. Those of the view that the market has bottomed and the cut in rigs will result in a large enough US production cut are currently still winning the battle over the reality crowd as even after the declines this week the oil complex is still higher than where it was before the current recovery rally began.  From the reality side of the battle nothing has changed with no signs of any significant supply cuts anyplace in the world.

The evolving geopolitical events around the world are more of a concern today than they were a month or so ago especially in places like Libya.  All signs currently suggest that the rally in crude oil prices has been driven primarily by the growing view that the collapse in rigs deployed to the oil sector in the US will result in significant crude oil production cuts. So far nothing has structurally changed in the US.

WTI decreased on the week while the spot Brent contract moved strongly higher resulting in the spot April Brent/WTI spread widening strongly for the sixth week in a row. With US refinery runs decreasing modestly total crude oil inventories increased 8.5 million barrels last week with the sixth build of that magnitude or greater in a row. Refiner demand for crude oil decreased but with the market still in a wide enough contango inventory building is still expected to continue.

HO and RBOB appreciated versus WTI. All of the individual crack spreads widened strongly along with widely followed 3-2-1 crack spread. The widening of the crack spreads has been driven by the arctic blast and refinery problems along the east coast of the US.

The Apr WTI contract decreased by 2.07 percent or $1.05/bbl last week as total combined crude oil and refined products increased by 2.5 million barrels during the report period. The April Brent contract also increased by 3.92 percent or $2.36/bbl.

The Apr Brent/WTI spread widened after widening during the previous week. The spot Apr Brent/WTI spread widened by 36.2 percent or $3.41/bbl. Crude oil stocks increased at Cushing and in PADD 3. At the end of last week the spread moved into a new higher technical trading range with $11.50/bbl on the support side and $15/bbl on the resistance end as the long term narrowing trend has been interrupted as the industry takes full advantage of the economics of storing crude oil. As long as crude oil stocks in Cushing continue to build the Brent/WTI spread should continue to widen.

On the distillate fuel front the April Nymex HO contract increased strongly for the third week in a row by 3.33 percent or $0.0636/gal on the week as distillate fuel inventories decreased strongly during a period of colder than normal temperatures over major portions of the USEC during the report period. Gasoline prices increased even after a modest build in inventories. The spot Nymex gasoline price increased by 7.4 percent or $0.1362/gal this past week.

Natural Gas

Fundamentals/Technicals – The Apr Nat Gas futures contract decreased after a smaller than expected net withdrawal from inventory even with the onset of an arctic blast over the eastern half of the US. The Apr contract decreased by 8.01 percent or $0.238/mmbtu. The market ended the week near its weekly lows as the short term weather forecasts continuing to show signs of cold temperatures starting to moderate heading into the first half of March.

Last week’s sell-off sent the April contract well below the short term uptrend support line that has been in play since the 9th of February. The market is now settling into a new lower trading range with $2.88/mmbtu on the resistance end and with the February 9th low of around $2.60/mmbtu as the new support area. Based on the way the market traded yesterday and with the simple fact that we are running out of winter the probability has increased that the market may test the April contract winter low of $2.60/mmbtu and possibly breach this level if the temperatures quickly begin to moderate.

The latest NOAA six to ten day and eight to fourteen day forecasts are still projecting cold temperatures (especially in the six to ten day forecast) but the weather pattern is changing. The longer term eight to fourteen day forest is showing additional signs of a moderation in temperatures as we approach the middle of month. The call on heating related Nat Gas demand is likely to begin to decline as the current cold blast begins to move out of the eastern portion of the US. In fact next week could be the last inventory withdrawal that is over 200 BCF for the current winter heating season.

Propane

Fundamentals/Technicals – Spot LPG prices ended Friday higher following the rest of the energy complex higher on a round of short covering heading into the weekend. Mt. Belvieu LST spot propane changed hands last at 62.25cts gallon, up 2.25cts Friday while gaining 3.0cts on the week. Non-LST spot propane traded last at 61.5cts gallon, up 1.375cts on the session, gaining 2.25cts on the week. Conway spot propane was done last at 57.75cts gallon, up 0.625cts Friday, up 1.0cts since Friday prior. Hattiesburg cash propane was talked at 65.25cts gallon, up 0.75cts Friday while surging 3.625cts on the week. In Canada, Sarnia propane was pegged unchanged at 74.25cts gallon for the session and week while Edmonton spot propane was talked up 0.625cts at 27.57cts gallon Friday, gaining 1.0cts on the week. In other liquefied petroleum gas cash markets, Mt. Belvieu normal butane traded at 75.0cts gallon, up 2.25cts while Conway normal butane changed hands at 69.25cts gallon, up 2.0cts. Gulf Coast isobutane traded at 74.5cts gallon, up 1.5cts while Conway isobutane was done at 88.0cts gallon, up 1.0cts. Mt. Belvieu non-LST natural gasoline traded at 123.0cts gallon, up 3.0cts. Gulf Coast purity ethane was done flat at 20.75cts gallon while ethane/propane mix was done at 19.5cts gallon, down 1.0cts.  Conway E/P mix traded at 18.0cts gallon, down 1.0cts.

Trading Recs/Purchasing

Trader’s Corner – Long/(Short) Trading Portfolio

Outright Direction: (MTM Follows)We were entered into a new long RB position in the overnight trading session.

March2-4

March2-5

Trader’s Corner – Long/(Short) Trading Portfolio

Trader’s Corner – Spread Trading Portfolio

Spreads: (MTM Follows)We did not enter into any new spread positions in the overnight trading session.

March2-6

March2-7

Hedging

Strategies – Hedgers should continue looking for downside moves and continue locking up a portion of their business for a month or two at the most for the moment.

March2-8

Purchasing

Strategies – We recommend purchasing fixed priced product for a week or two at the most, as the market continues to trade mixed.

March2-9

Weather Watch

6 to 10 on the left and 8 to 14 on the right

March2-10

Price Overview – Daily Hedger Oil Board

March2-11

EMI Present the Continuing Education Tidbit of the Day

Total EIA Distillate Inventories & EMI Projection for the Rest of 2014

March2-12


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Daily Hedger is published daily by the Energy Management Institute,1324 Lexington Avenue, #322, New York, NY 10128. Copyright 2014. Reproduction without permission is strictly prohibited. Subscriptions: $495 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Managing Editor Salvatore Umek. Information and opinions expressed in this publication are intended to provide general market awareness. The Energy Management Institute and the Daily Hedger are not responsible for any business actions, market transactions, or decisions made by its readers based on information published in this report. Readers of the Daily Hedger use this market information at their own risk.


*** RISK DISCLOSURE STATEMENT

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL.  YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.  IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE FOLLOWING:

  • IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND OF ALL TRANSACTION COSTS.
  • IF YOU PURCHASE OR SELL A COMMODITY FUTURE OR SELL A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR POSITON.  IF YOU DO NOT PROVIDE THE REQUESTED FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSTION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.
  • UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFCULT OR IMPOSSIBLE TO LIQUIDATE A POSITON. THIS CAN OCCUR FOR EXAMPLE, WHEN THE MARKET MAKES A “LIMIT MOVE”.
  • THE PLACEMENT OF CONTINGENT ORDERS BY YOUR TRADING ADVISOR, SUCH AS A “STOP-LOSS” OR “STOP-LIMIT” ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
  • A “SPREAD” POSITION MAY NOT BE LESS RISKY THAN A SIMPLE “LONG” OR “SHORT” POSITION.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU.  THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

Energy Market Analysis – Monday Morning Jan 12, 2015

Below is today’s edition of EMI’s Energy Market Analysis. To get Energy Market Analysis delivered to your inbox daily, you can subscribe here or sign up for a free trial subscription here.


Quote of the Day

“Most of us can read the writing on the wall; we just assume it’s addressed to someone else.” – Ivern Ball

011215-1

After falling for the last seven weeks in a row the oil complex is starting yet another week on the defensive. Oil prices are trading at an over 5 ½ year low with no sign of any bottoming yet on the horizon. Market participants are now looking at WTI trading as low as $40/bbl … an area some are suggesting would be needed to clear the global surplus. In fact Goldman Sachs cut their WTI outlook for the six month period to $39/bbl and their twelve month forecast to $65/bbl with Brent at $43/bbl and $70/bbl for the same timeframes.

Goldman like many other analyst do not expect Saudi Arabia or other key OPEC members to cut production anytime soon even though Venezuela is in the midst of shuttle diplomacy calling on OPEC producers to work together to spur a recovery. So far it seems only Iran has joined Venezuela in commenting on OPEC doing something to solve the collapsing oil problem. Neither Venezuela nor Iran are in a position to do anything alone within OPEC rather the key to cutting production will have to be led by Saudi Arabia and other Arab Gulf producers which does not look like that is going to happen anytime soon based on all of their comments over the last several weeks.

The lower price environment is starting to hit US operations as drilling rigs decreased again last week by 61 rigs according to the latest Baker Hughes report. Over the last five weeks drilling rigs have declined by 154. Also thirty five horizontal rigs normally used to drill in places like North Dakota’s Bakken area and in the Permian were idled last week for the largest single week drop over the last six years according to Baker Hughes.

Bottom line no sign that OPEC is going to change their market share strategy anytime soon and as such prices are likely to continue to decline over the coming weeks until the price hits a level that starts to result in non-OPEC production starting to decline. So far even with the reduction in drilling rig over the last five weeks US crude oil production is still robust and within a few barrels of the highest level since the EIA has been reporting data (1983)

On a weekly basis oil prices were modestly lower for the seventh weekly decline in a row as the market continues to adjust to the ongoing market share war initiated by OPEC. The evolving geopolitical events around the world continue to be a non-event insofar as an oil interruption issue is concerned and have only impacted the short term price direction from time to time as we continue to see in places like Libya. Crude oil prices decreased last week as the market continued to react to the view that the surplus of crude oil will continue to build well into 2015 or as long as OPEC continue to chase market share rather than to defend the price level.

011215-2

Both the WTI and Brent contracts decreased with the spot Feb Brent contract decreasing more than WTI on the week. The spot February Brent/WTI spread narrowed on the week after narrowing during the previous week. With the US refinery maintenance season over total crude oil inventories decreased last week. Refiner demand for crude oil is increasing but with the market in a wide enough contango inventory building may continue going forward.

RBOB depreciated more than WTI while HO appreciated versus WTI. The HO-WTI crack spread widened on the week while the RBOB crack narrowed along with the widely followed 3-2-1 crack spread. The externals were as secondary price driver for the oil complex.

The February WTI contract decreased by 10.79 percent or $6.06/bbl last week as total combined crude oil and refined products increased strongly during the report period. The February Brent contract declined more than the Feb WTI contract.

The Feb Brent/WTI spread narrowed after narrowing during the previous week. The spot Feb Brent/WTI spread narrowed by 51.39 percent or $1.85/bbl. Crude oil stocks increased at Cushing but declined in PADD 3. As of this morning the spread is in a new lower technical trading range with $2.40/bbl on the resistance side and $1.10/bbl on the support end as it remains in its long term narrowing trend that has been in play since mid-January of 2014.

Market participants have been moving back and forth between the international supply issues and the destocking of crude oil inventories in the Cushing & PADD 3 areas.  Both of these factors impacted the direction of the spread again last week with the international supply issues more dominant on the Brent crude oil situation resulting in the spread narrowing last week.

On the distillate fuel front the Nymex HO contract decreased by 5.25 percent or $0.0944/gal on the week as distillate fuel inventories increased more than the market expectations with warmer than normal temperatures moving over major portions of the US during the report period. Gasoline prices decreased after a strong build in inventories. The spot Nymex gasoline price decreased by 7.53 percent or $0.1078/gal this past week.

The Feb Nat Gas futures contract decreased even after a larger than expected net withdrawal from inventory that was below last year and the five year average. The Feb contract decreased by 2.39 percent or $0.072/mmbtu. The market ended the week in a light short covering mode that has already reversed into selling in this morning’s trading. In fact as of this writing Nat Gas futures are lower by around 3.1 percent compared to Friday’s settle.

The spot Nat Gas futures price is still trading below the psychological $3/mmbtu level even with a larger than expected draw from inventory this week and with a cold blast engulfing major parts of the US. Even with the cold blast in place this week the inventory withdrawal that will be reported in next week’s EIA inventory report will be only slightly above the five year average but below last year based on my current model run. The remainder of January is projected to show smaller than normal withdrawals as another bout of moderating temperatures roll into major portions of the US.

The latest NOAA six to ten day and eight to fourteen day forecasts are both less supportive for heating related Nat Gas demand than those issued earlier in the week. The forecasts are projecting larger portions of the US returning to normal and even above normal temperature levels. The six to ten day forecast is projecting about 50 percent of the country expecting above normal temperatures with the majority of the rest of the country projected to experience normal temperatures with only a few small pockets of very cold temperatures for the January 14th to 19th timeframe.

The eight to fourteen day forecast is simply bearish for Nat Gas above normal temperatures are projected over about the entire US for the period January 16th to 22nd. Heating related demand for Nat Gas is going to be below normal for the forecast period and inventory withdrawals will be below normal and below last year over the same timeframe.

On the financial front equity markets were lower in active trading around the world as the broader EMI Global Equity Index decreased by 1.13 percent. The EMI Global Equity Index has declined on the week even after a few strong up days last week. The year to date loss is at 1.13 percent. There are now only three of the ten bourses in the Index in positive territory. China remains on top of the leader board with Japan still holding the bottom spot. Global equities have been a positive price driver for the oil complex over the last several trading sessions.

011215-3

The Yen and the Euro were lower while the US Dollar Index was higher on the week. Last week the US dollar was a negative directional price driver for oil and most commodity markets.

I am maintaining my oil view and bias at cautiously bearish as the market remains bearish but in oversold territory. The intense selling started again last week and continued throughout the week even as the market continues to search for bottom. I continue to fly the caution flag as the market remains susceptible to additional short covering rallies at any time.

011215-4

I am maintaining my oil view and bias at cautiously bearish as the market remains bearish but in oversold territory. The intense selling started again last week and continued throughout the week even as the market continues to search for bottom. I continue to fly the caution flag as the market remains susceptible to additional short covering rallies at any time.

I am maintaining my Nat Gas view at neutral with my bias at cautiously bearish as the short term weather is still projecting warmer than normal temperatures returning after a short bout of cold temperatures this week. Nat Gas demand will likely be below normal for the month of January based on current temperature projections.

Markets are mostly lower heading into the US trading session as shown in the following table.

011215-5

PRESS RELEASE: AS FUEL PRICES APPROACH LOW POINT, COMPANIES URGED TO LOCK IN LOWER PRICES NOW

Energy Management Institute Advises Companies to Develop an Energy Risk Management Program Now to Ensure Extraordinary Cost Savings.

***EMI can educate and prepare you for the oil market’s inevitable swing to the upside with our two-day Introduction to Petroleum Hedging course on February 11-12 in Atlanta, GA. Our blog readers are eligible to receive $200 off of the regular registration fee. Just use promo code BLOG200 when registering. You can get course details and register here.***

NEW YORK, NY (January 9, 2015): Energy Management Institute (EMI.org) is advising its clients to prepare now in order to take advantage of a quick turnaround in gasoline and diesel prices once crude bottoms out. Since 2004, each time the crude market reaches its low point the diesel market rebounds and recovers 80% of its lost value in just over 4 months. This fact holds true for gasoline and jet fuel prices as well. Once the market turns, unprepared companies have little time to develop a strategy to lock into lower prices.

“Time and again we see companies fail to prepare to take advantage of extraordinary cost savings,” said J. Scott Susich Senior Partner at EMI. He went on to say, “Companies become fixated on trying to time the market and catch the bottom only to see their opportunity squandered away.”

EMI’s advice is based on recently completed analysis of ten years of energy prices focused primarily on crude and its relationship to diesel. Since 2004 the market has experienced seven rapid declines in crude price of 20% or more. In six out of seven of those declines the market recovered at least 80% of its value. The one exception being the meteoric drop in energy prices associated with the global financial crisis of late 2008. Currently the market is on the downside leg of the eighth such drop this decade. The analysis showed that once a bottom is reached the market turns upward and recovers very quickly. The six decline and recovery periods are highlighted below:

Hedging-PR-1

When we examine the effect on retail diesel prices during these periods, we see a high degree of correlation and the same rapid recovery of 80% of the lost value. The table below details these movements:

Hedging-PR-2
(Prices are EIA on-highway retail diesel)

“Locking in to low prices requires the development of an energy risk management program with buy-in from the very top of the organization. Getting the proper authorizations can be a months-long process for many companies emphasizing the need to begin before the bottom of the market is reached,” said Susich.

Many companies waiver from implementing such a plan believing the world is in for a long period of low energy prices.“We absolutely believe current low prices will not be the norm and oil prices will recover to higher levels as geopolitical risk is not going away. Lower oil prices will ultimately result in an increase in demand and, frankly, we do not think many of the OPEC countries will be able to sustain lower prices for an extended period of time before eventually going back to their historical policy of defending prices by cutting production.”

About EMI
New York-based EMI (www.emi.org) provides specialized education, data services, and advisory services to major oil companies, utilities, Fortune 500 end-users and top transportation fleets throughout the world. As a division of Advanced Energy Commerce, Inc., EMI provides critical business information services and thought leadership in the energy segments of Oil, Gas, Alternative Fuel, and Electric Power.

EMI provides a tremendous amount of expertise in developing, implementing, and executing risk management programs. EMI helps businesses, both large and small, successfully manage their exposure to price risk in the face of never-ending market volatility. For more information on EMI’s Advisory Services, visit www.emi.org.

Energy Market Analysis – Thursday Morning, April 17, 2014

Featured below is today’s edition of our daily newsletter, Energy Market Analysis, published by Energy Management Institute. You can get the report everyday by subscribing here. Or get a FREE two-week trial subscription here.

Quote of the Day
In family life, love is the oil that eases friction, the cement that binds closer together, and the music that brings harmony. – Eva Burrows

Image

The main issue keeping oil prices near the highs of the two week or so uptrend continues to be the evolving situation in the Ukraine and the concern that an escalation could potentially disrupt oil supplies from Russia. Overnight the media is reporting at least three pro-Russian militants were killed, at least thirteen wounded and 63 were arrested in a confrontation at a military base in the east of the country. Tensions are rising.

Today diplomats from the Ukraine, the US, the EU and Russia are meeting in Geneva to try to de-escalate the situation using diplomatic means. US officials said a full-scale Russian invasion of eastern Ukraine would result in broad U.S. and European sanctions on key Russian economic sectors, including the energy industry. However, European nations are divided on whether to limit its access to Russia’s oil and gas supplies, and a vote to sanction must be unanimous among the EU’s 28 member states. Until this situation is diffused oil prices and Nat Gas prices in Europe will remain firm especially heading into the long holiday weekend.

Absent the Ukraine oil prices would likely be lower as overall oil fundamentals are basically bearish as the crude surplus in the US continues to grow while global demand may be waning.

The geopolitical risk emanating from the Ukraine is also impacting the Brent/WTI spread. The spread has staged a modest recovery so far this week after hitting a low on April 11th. The broader, longer term trend is still toward a return to normalcy. That said with Ukraine situation is impacting the Brent side of the spread while the spring refinery maintenance season is having an impact on the WTI side of the spread. The road to normalcy is going to be choppy over the next month or so.

The following two charts (updated with the latest inventory data release) continue to highlight what has been happening. The first chart shows current Cushing crude oil inventory data compared to its five year average as well as the highest and lowest levels hit during the last five years for each individual week  In addition I have included what I call the pre-surplus five year average for the period 2004 through 2009. This average inventory level was approximately 21.7 million barrels over the aforementioned period.

Image

As shown on the chart crude oil stocks in Cushing have resumed its destocking trend that has been in play for the vast majority of this year with the level well below the current five year average as well as the minimum level over the last five years for the same week. Inventories are heading toward the so called normal pre-surplus level as the industry moves stocks to normal operating levels required by the refining and logistics sectors.

Crude oil stocks in Cushing are now only about 5.1 million barrels above the pre-surplus inventory average. With the WTI forward curve still in a relatively steep backwardation the rate of destocking in Cushing is likely to continue at the rate of decline it has been running at over the last few months. If so current inventory levels should hit the pre-surplus level within the next several months.

As the Cushing overhang continues to recede it has a direct impact on the pricing relationship between Brent and WTI. The following chart shows the current path of the spot Brent/WTI spread compared to its current five year average as well as the average trading level during the pre-surplus five year average for the period 2004 through 2009. Over the 2004 through 2009 period the Brent/WTI spread averaged a $0.79/bbl discount of Brent below WTI. As of this writing the spot spread is trading around a $6.30/bbl premium of Brent over WTI and has reversed to a widening trend for the reasons discussed above after narrowing for most of the year. The narrowing tend will resume.

Image

Several factors continue to support my view of the spread returning to a more normal historical trading relationship (what I refer to as the 2004-2009 average). The main drivers keeping the spread in a narrowing pattern are:

The WTI forward curve still in a relatively steep backwardation while Brent is starting to move into a slight contango in the front end of the curve.

  • The outflow capacity out of Cushing is continuing to increase as the Keystone Gulf Coast pipeline works its way to its design capacity while the Seaway Twin pipeline readies for start-up toward the second half of May or early June.
  • Global oil demand seems to be easing especially in China and Europe which will impact the Brent side of the spread.
  • The completion of the US spring refinery maintenance season will result in an increase in crude oil demand.
  • The potential return of Libyan oil production in the short term as discussed above will also have a more direct impact on the Brent side of the spread.

This week’s oil fundamental snapshot was biased to the bearish side with total crude oil and refined products inventories surging higher as crude oil stocks increased in the US and in PADD 3. With another above normal build in crude oil stocks in this week’s report the main focus continues to be the big shift that is well underway in crude oil supply between PADD 2/Cushing and PADD 3 (Gulf Region).

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The movement of crude oil from the mid-continent has been accelerating as the pumping rate of the newly commissioned Keystone Gulf Coast Pipeline continues to slowly work its way toward design capacity of 700,000 bpd. This week’s EIA inventory report showed a small draw in crude oil stocks from the broader PADD 2 (0.1 million barrels) region as well as in Cushing of about 0.8 million barrels while PADD 3 crude oil inventories increased by 5.2 million barrels.

The shift of crude oil from PADD 2 and Cushing showing up in the Gulf region will result in inventories continuing to build further as the refining sector progresses into the maintenance season. The maintenance season is only starting to impact the Gulf as refinery run rates in PADD 3 are still hovering near the 90 percent utilization level. The movement of crude oil to the Gulf is certainly beginning to impact all of the pricing interrelationships of both US and international crude oil grades as well as refined product markets. For example the LLS/WTI spread is still trading well below the $3/bbl level making spot movement of light Bakken crude oil by rail uneconomical.

Total commercial stocks of crude oil and refined products increased by 14.4 million barrels. The year over year deficit narrowed strongly to 28.9 million barrels while the deficit versus the five year average for the same week narrowed to 14.2 million barrels.

Crude oil inventories increased as crude oil imports increased strongly last week (the increase in crude imports was mostly in PADD 5 or the West Coast). Total crude stocks built by 10 million barrels. With the increase in crude oil stocks this week the crude oil inventory status versus last year is showing a surplus of 6.5 million barrels while the surplus versus the five year average for the same week came in around 26.8 million barrels.

PADD 2 crude oil inventories decreased slightly  by about 0.1 million barrels while Cushing, Ok crude oil inventories also decreased by about 0.8 million barrels. PADD 2 crude oil stocks are now showing a deficit of 19.4 million barrels versus last year with a 2.2 million barrel deficit versus the five year average. The Cushing area deficit came in at 24.3 million barrels versus last year with a 12.3 million barrel deficit compared to the five year average.

PADD 3 crude oil stocks surged by 5.2 million barrels as crude oil imports into PADD 3 increased modestly.  PADD 3 crude oil stocks are now showing a surplus of 22.2 million barrels versus last year with a 24.3 million barrel surplus versus the five year average. PADD 3 crude oil stocks set yet another new record high as shown in the following chart. Based on EIA reported shell capacity in PADD 3 crude oil inventory are at about the 90 percent utilization level.

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Distillate stocks decreased by 1.3 million barrels and within the market expectations even as total US refinery run rates increased to 88.8 percent of capacity. The year over year comparison shows current stock levels at about 3.3 million barrels below last year. The five year average deficit came in around 24.4 million barrels.

Gasoline inventories decreased less than the expectations. Total gasoline stocks decreased by about 0.1 million barrels on the week as the industry continues the transition from winter grade gasoline. The deficit versus last year came in around 11.4 million barrels while the deficit versus the five year average for the same week came in at about 6.3 million barrels.

Gasoline stocks increased modestly by 0.3 million barrels in PADD 1 (US East Coast) this week with the deficit versus last year coming in around 5.8 million barrels with a 1.8 million barrel deficit compared to the five year average for the same week.

The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have presented a mixed categorization on the week for the complex. However, this week’s report was biased to the bearish side.

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I am maintaining my oil view at neutral and my bias at neutral as the market digest the evolving situation in the Ukraine while awaiting news of Libyan oil possibly flowing once again. I continue to suggest that you remain cautious on Libya until oil is consistently flowing once again.

I am maintaining my Nat Gas view at neutral and my bias at neutral as the market moved back into a higher trading range ahead of the upcoming lower demand shoulder season. The Nat Gas spot Nymex contract remains in the $4.30/mmbtu to $4.70/mmbtu trading range.

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Markets are mostly higher heading into the US trading session as shown in the following table.

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Best Regards,

Dominick A. Chirichella

dchirichella@mailaec.com

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Energy Market Analysis is published daily by the Energy Management Institute, 1324 Lexington Avenue, #322, New York, NY 10128. Copyright 2009. Reproduction without permission is strictly prohibited.

Editor in Chief: Dominick A. Chirichella, Publisher: Stephen Gloyd, Editor: Sal Umek. Information and opinions expressed in this publication are intended to provide general market awareness. The Energy Management Institute and the Energy Market Analysis are not responsible for any business actions, market transactions, or decisions made by its readers based on information published in this report. Readers of the Energy Market Analysis use this market information at their own risk.

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Brent/WTI on the Road to Normalcy

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The most significant event in the oil complex over the last twenty four hours has been the further deterioration in the Brent/WTI spread. Over the last twenty four hours the spread narrowed by another 22 percent or over $1/bbl. In spite of the first weekly build in Cushing crude oil stocks in months the spread still narrowed on the potential of the return of Libyan crude oil, a slight calming in the Ukraine and disappointing export and crude oil import data out of China.

As I have been forecasting for months the spread is on the road toward normalcy or to the trading level that was in play prior to the Cushing surplus build-up. The following two charts continue to highlight what has been happening. The first chart shows current Cushing crude oil inventory data compared to its five year average as well as the highest and lowest levels hit during the last five years for each individual week  In addition I have included what I call the pre-surplus five year average for the period 2004 through 2009. This average inventory level was approximately 21.7 million barrels over the aforementioned period.

As shown on the chart crude oil stocks in Cushing have been declining (except for this week) at an accelerated rate for the vast majority of this year with the level still well below the current five year average as well as the minimum level over the last five years for the same week. Inventories are heading toward the so called normal pre-surplus level as the industry moves stocks to normal operating levels required by the refining and logistics sectors. 

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Crude oil stocks are now only about 5.9 million barrels above the pre-surplus inventory average. With the WTI forward curve still in a relatively steep backwardation the rate of destocking in Cushing is likely to continue at the rate of decline it has been running at over the last few months. If so current inventory levels should hit the pre-surplus level within the next several months.

As the Cushing overhang continues to recede it has a direct impact on the pricing relationship between Brent and WTI. The following chart shows the current path of the spot Brent/WTI spread compared to its current five year average as well as the average trading level during the pre-surplus five year average for the period 2004 through 2009. Over the 2004 through 2009 period the Brent/WTI spread averaged a $0.79/bbl discount of Brent below WTI. As of this writing the spot spread is trading around a $4/bbl premium of Brent over WTI and has been in narrowing trend for most of the year as it works its way back toward the pre-surplus trading level.

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Several factors continue to support my view of the spread returning to a more normal historical trading relationship (what I refer to as the 2004-2009 average). The main drivers keeping the spread in a narrowing pattern are:

  • The WTI forward curve still in a relatively steep backwardation while Brent is starting to move into a slight contango in the front end of the curve.
  • The outflow capacity out of Cushing is continuing to increase as the Keystone Gulf Coast pipeline works its way to its design capacity while the Seaway Twin pipeline readies for start-up toward the second half of May or early June.
  • Global oil demand seems to be easing especially in China and Europe which will impact the Brent side of the spread.
  • The potential return of Libyan oil production in the short term as discussed above will also have a more direct impact on the Brent side of the spread.

This week’s EIA oil fundamental snapshot was biased to the bearish side with total crude oil and refined products inventories increasing as crude oil stocks increased in the US and in PADD 3 due to the re-opening of the Houston Ship Channel. With another above normal build in crude oil stocks in this week’s report the main focus continues to be the big shift that is well underway in crude oil supply between PADD 2/Cushing and PADD 3 (Gulf Region).

The shift of crude oil from PADD 2 and Cushing showing up in the Gulf region will result in inventories continuing to build further as the refining sector progresses into the maintenance season. The maintenance season has not impacted the Gulf yet as refinery run rates in PADD 3 are once again above the 90 percent utilization level. The movement of crude oil to the Gulf is certainly beginning to impact all of the pricing interrelationships for both US and international crude oil grades as well as refined product markets. For example the LLS/WTI spread is now trading below the $3/bbl level making spot movement of light Bakken crude oil by rail uneconomical.

PADD 3 crude oil stocks surged by 3 million barrels (or almost three times as much as the decline from the HSC closure during the previous week) as crude oil imports into PADD 3 increased strongly.  PADD 3 crude oil stocks are now showing a surplus of 15.2 million barrels versus last year with an 18.7 million barrel surplus versus the five year average. PADD 3 crude oil stocks set yet another new record high as shown in the following chart. The big shift continues.

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Nat Gas Inventory Replenishment Challenge

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Nat Gas futures prices are back in the $4.30/mmbtu to $4.70/mmbtu trading range after a very short journey into the next lower trading range. As shown in the following chart of the spot continuation Nymex Nat Gas contract the market has been mostly trading in the aforementioned trading range as the major run-up in prices due to the colder than normal winter weather subsided. 

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With the exception of the high volatility winter price surge that occurred during the period from the second half of January to the second half of February the current trading range was also in play going back to early December of last year. From a technical perspective the boundaries of the current trading range have been tested many times and for the most part have held suggesting that this is likely to be the range that could be in play as the industry works its way into the lower demand shoulder season.

As I have been discussing for several months the industry is facing a significant challenge to replenish total Nat Gas inventories back to “so called” normal or comfortable pre-winter levels. The five year average injection rate has been about 2.04 TCF. To get back to the five year average the industry will have to add about 3 TCF into inventory or about 985 BCF above the normal injection level or an additional 33 percent more Nat Gas. In fact I do not think the industry has ever injected this much gas into the storage during the injection season.

In the last EIA Short Term Energy Outlook report (March, 2014) the EIA is forecasting a 2.5 percent increase in Nat Gas marketed production across the year. The following table extracts out a comparison covering the traditional injection season of April through November. The table compares marketed Nat Gas production in 2013 versus what the EIA is projecting for 2014 for the injection season. As shown if the actual production levels are in sync with the latest round of projections there will be an increase of about 350 BCF in production this season over what was available last year.

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As mentioned above the industry will have to inject an additional 985 BCF into inventory over and above what has historically been injected into inventory using the five year average as a reference point. The potential additional production covers about 35 percent of the 985 BCF increase required. Thus there will still be a gap of about 635 BCF assuming all goes as projected with production this year.

Also the projections for supply gains do not incorporate any major outages due to an active hurricane season, especially in the Gulf of Mexico. In addition it is still an unknown as to how the summer cooling season will evolve this year. Certainly a hotter than normal summer will impact the amount of additional Nat Gas production that would be available for storage injections.

In summary I do not think it is going to be a slam dunk or anywhere near a given that the industry is going to be able to replenish inventories back to the normal or five year average level ahead of the 2014/15 winter heating season. So far market participants seem to approaching this major topic with a high level of caution as price levels do not currently reflect any risk premium related to ending the injection season at a level well below the normal pre-winter level.