Going Forward Nat Gas Market will be all about Replenishment!

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This week showed another above normal withdrawal from inventory with a new bout of artic air heading to the lower forty eight. After a week of warmer than normal temperatures starting early next week another round of bitter cold is heading to the eastern half of the US which will result in the inventory deficit gap widening further and putting the industry in a challenging position to get inventories back to normal levels by the start of the next winter heating season.

So the big question facing the industry is will inventories build strongly enough during the normal seasonal injection period to get the level back to where it was at the start of this year’s winter season. Right now the way the market is trading in the front end of the forward curve suggests that the industry (or at least the spec community) is starting to develop a view that this year’s inventory injection season will come up short by the start of the upcoming winter heating season.

This week’s inventory withdrawal of 250 BCF sent my projection for the end of season (EOS) inventory level down to about 1,039 BCF and just about where the season ended in 2004 as shown in the following chart. Obviously there are strong differences in the level of production now versus 2004 as well as the demand level for both of these years.


The following table compares the projected end of season inventory level this year with both last year and the five year average. In addition the table compares the total projected inventory level heading into the upcoming winter heating season (2014/15) using the five year average injection level applied to the projected end of season level for this year.

This comparison suggests that the industry is likely to have a huge challenge in getting back to a comfortable pre-winter inventory level. Whether I compare the projected start of the 2014/15 winter level to last year or the five year average there is still a huge gap that will have to be made up.  With the EIA projecting total US production to increase about 2.2 percent this year over last year I am not certain that the industry is will be able to get to the five year start of winter level this year.


That said the following chart shows prices on a seasonal basis compared today’s spot futures price with where it was back in 2004 and 2003. As shown in the chart today’s spot price is already well above 2004 and on a similar path as in 2003 when the end of season inventory level came in about 30 percent below where my current EOS projection is.


The current price trend is evolving like 2003 and 2004 suggesting that the market is starting to form a view that the industry may not be able to rebuild inventories at a fast enough rate and get back to even last year’s start of winter level especially if the upcoming summer cooling season turns out to be hotter than normal and the hurricane season is more active than normal especially in the Gulf of Mexico.

This short analysis suggests to me that the Nat Gas futures market is not heading for a sustainable downtrend anytime soon. Yes there will be several downside corrections once the market is convinced that the winter weather is finally over (even possibly before). However, I do not expect any selling to be long lasting and to be relatively shallow. Fundamentals will likely play a much stronger role in price direction for the rest of this year.

From a trading perspective I would expect the trading community to initiate timing spreads across next winter during downside correction phases. In addition I would strongly recommend that the Nat Gas hedging community also begin to look for windows of opportunity to start to set next winter’s hedges during downside corrections. Using option hedging strategies could be the way to go once volatility starts to decline toward more normal historical levels.

I will be updating these tables and my analysis only in my daily Natural Gas Market Analysis newsletter and likely add a few more data points on a weekly basis to coincide with new data releases by the EIA.

I invite you try a FREE TRIAL of my newsletter by going HERE.

WTI-Brent Spread: A Technical View

Since 2012, the -10.50 level in the spread has consistently acted as an important pivot point for the spread and is therefore quite instructive in showing continuous shifts in the balance of power in the market (see Weekly continuation chart below).  First, note that throughout 2012 the -10.50 level served as important resistance to any rally attempts throughout calendar year on our journey downward to November, 2012 lows at -26.00.

Next the Spring, 2013 challenge and eventual break of this same -10.50 pivot level foreshadowed our eventual Summer reclamation of parity in the spread.  By October, 2013 we again retested the -10.50 level and our eventual break of the level lead to a stab at -20.00, only to resolve itself in yet another retest at 2013’s year end.

With so much historical emphasis on the -10.50 level our recent break above the pivot during the week of January 27 suggests an underlying strength in the WTI-Brent Arb with the potential to challenge the old resistance at -5.00 and perhaps even an eventual retest of parity.  That stated, as usual the fly in the ointment for the spread is the -10.50 level itself which currently serves as support, but if broken will immediately reverse the tone of this market from bullish to bearish.


Richard Weissman is a Senior Associate with the Energy Management Institute (www.emi.org) and author of Trade Like a Casino: Find Your Edge, Manage Risk and Win Like the House.

The Big Crude Oil Shift Begins!

By Dominick A. Chirichella
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With the Keystone Gulf Coast pipeline running smoothly and slowly ramping up to its design capacity a serious volume of oil is starting to be moved from Cushing down to the US Gulf Coast. For about a month or so the Gulf Coast has been on my radar as well as on the mind of many in the industry insofar as the disposition of crude oil in the greater PADD 3 region. The main question(s) in the market… will a surplus of crude oil build in the Gulf as large volumes of crude oil are moved from the Cushing area and what are the implications on the major inter-market spread relationships? Just last week alone the Keystone Gulf Coast Pipeline pumped at a rate of about 243,000 bpd of oil to the US Gulf (as reported by Genscape) or about 1.7 million barrels for the week.

The following set of tables is a summary of some of the major data points that are important in addressing the aforementioned questions from a US fundamental perceptive.  There are two tables… the first table shows the data in absolute terms while the second table compares the current data points to various historical benchmarks. The first table… EMI P3/P2 Crude oil Surplus Radar Screen highlights Inventory levels, crude oil Imports, refinery inputs and run rates for both PADD 3 and PADD 2, Cushing inventory levels, a regional comparison, total US crude oil production, Canadian crude oil imports and several inter-market spread relationships. Following are the main highlights from this analysis.



  • PADD 3/US Gulf Coast

– Crude oil stocks have built strongly for the last three weeks in a row and are now above both last year and the five year average but below the highest level for the same week over the last five years.

– Crude oil imports have been steadily declining into the Gulf Coast and are currently below the lowest level for the same week over the last five years.

– The robust US crude oil production rates are continuing to back out imports.

– Refinery run rates in the Gulf are still near the higher end of the normal range for this time of the year as the refinery maintenance season seems to be starting a bit later that normal.

– Overall the Gulf region is within the normal fundamental operating range for this time of the year but there is not a large cushion in the deficit gap between the current inventory level and the five year maximum level.

– The key data point to watch close is the rate of inventory build this season as compared to the build rate for the five average. The average weekly build shown by the five year average between this week’s report and the end of April is about 1.6 million barrels per week for a total build of about 19 million barrels.

  • PADD 2/Cushing

– Both PADD 2 and Cushing crude oil stocks are running below last year at this time but are still above the five year average level for the same week.

– Crude oil imports into the region have been steadily increasing in contrast to the steady decline in imports into the Gulf area.

– The increase in imports into PADD 2 is primarily coming from Canada which has seen its imports to the US steadily grow versus all of the historical benchmarks shown in the table.

– Refinery run levels and crude oil inputs to refineries are all noticeably higher than last year as well as the five year average as refinery margins in the region remain robust due to the deep discount for heavy Canadian crudes with the refinery maintenance yet to get underway.

  • Regional Crude Comparisons

– I have used two measures to gauge the relationship between crude oil inventories in the various regions as a macro estimate of flow between the regions.

– First the ratio of the PADD2 to PADD 3 crude oil inventory level is currently running at 63.9 percent and lower than last year as PADD 2 inventories declined year on year while PADD 3 stocks increased.

– The same can be said for the ratio of Cushing stocks versus PADD 3.

– The same conclusions can also be draw when looking at the difference in inventory levels between the various regions as shown in the table.

  • Spread Valuations

– With Cushing inventories declining by over 20 percent on a year on year comparison the Brent/WTI spread has narrowed by about $13.05/bbl versus last year.

– The spread is also below the five year average as it slowly moves toward a more a historical relationship that existed prior to the crude oil surplus build-up in the Cushing area.

– The LLS/WTI spread has been consistently following the direction of the Brent/WTI spread narrowing by $14.82 versus last year and even more strongly than the Brent/WTI spread. As the LLS/WTI spread continues to narrow it will certainly impact the economics of moving light oil in particular by rail to the US Gulf Coast.

– Refinery margins measured by the Nymex oil commodities for both RBOB and HO are well off of the levels enjoyed last year by the refining sector… especially those in PADD 2 and compared to the five year average as WTI firms relative to Brent as well as refined products. The normalization of crack spreads is also in play and will continue to adjust as the Brent/WTI spread narrows further.

Overall, there is still no significant surplus of crude oil in the Gulf region but with close to several million barrels per week (and rising) of crude oil moving out of the Cushing area to the Gulf the exposure is certainly moving into the forefront. Going forward Cushing stocks are likely to move closer to their pre-surplus levels at a time when the Gulf region will be in the midst of its normal spring maintenance season. It is not a matter of will a crude oil surplus form in the Gulf but rather when, to what degree and how long will it last.

Over the longer term I am still expecting the Brent/WTI spread to narrow but over the next few months as Keystone continues to ramp up while refiners undergo maintenance the spread will be volatile and like have difficulty in narrowing strongly until refineries are back to normal seasonal operating levels toward the end of April and into May.

I will be updating these tables and my analysis only in my daily Energy Markets Analysis newsletter and likely add a few more data points on a weekly basis to coincide with new data releases by the EIA. I invite you try a free trial of my newsletter here.

Analysis: March 2014 CME Group ULS Diesel Crack Spread Futures

As seen in the chart below, the CME Group March 2014 ULS Diesel Crack Spread futures is displaying low volatility as measured by its ten-day Average Directional Movement Index (ADX) recent registering of a reading below fifteen, suggesting low volatility and, therefore, a highly unstable consensus regarding the asset’s value. In addition, the spread has been in a clearly defined range since mid-December with $31/bbl. acting as resistance and $27/bbl. serving as support.  Although the recent trend has been lower and therefore favors a breakout to the downside we subscribe to the motto, “don’t anticipate, just participate” and therefore favor bracketing the market with buy stops at the $31.00/bbl. area  and sell stops at the $27.00/bbl. area.  Whichever side gets filled, the other order will act as our intial catastrophic stop-loss level.

That stated, once the market achieves a statistically significant unrealized gain of $1.90/bbl (which was the 10-day ATR as of the 2/6/14 settlement), we favor taking partial profits and moving stops to breakeven on the remainder of the position (and thereafter trailing at the prior day’s high until stopped out on the remainder).


Richard Weissman is a Senior Associate with the Energy Management Institute (www.emi.org) and author of Trade Like a Casino: Find Your Edge, Manage Risk and Win Like the House.

The Sleeper – Distillate Fuel

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This has been one of the coldest winters in the US in a long time. Nat Gas prices have been exhibiting very high levels of volatility reminding many of the pre-shale revolution days. Even Propane has been in surge mode as inventories throughout the mid-west have declined strongly. Weather along the North East coast… the primary heating oil market has been hit with several arctic blasts or as some like to describe it as the polar vortex descending south to the US. Even with the strong winter like weather heating oil prices at the futures market level have not acted anything like what we have seen in the Nat Gas and Propane markets.

Not only is heating oil consumption above normal along the east coast but exports of its sister fuel… diesel have been robust and consistently averaging above the 1.3 million barrels per day level for months. The following chart compares the current total US distillate fuel inventory level with last year, the five year average as well as the 24 year average (since EIA has been reporting distillate inventories on their website).


The current inventory level is not only below last year and the five year average it is well below the 24 year average and at the lowest level for this time of the year going back to 2001. If the rest of the winter season remains colder than normal the end of the season inventory level could be approaching the 100 million barrel area or a level not seen since the end of the 2002/2003 winter heating season (end of March).

With an inventory profile described above one would expect this year’s Nymex futures pricing pattern to be well above last year at this time. The next chart shows that the current price level is well below where it was last year even though the inventory situation is below all of the historical comparisons as well as below the so called normal operating level for the same timeframe.

So what gives and why are HO futures prices trading as they are? First and foremost I believe market participants do not feel that supply is an issue… even with cold weather as imports from Europe (gasoil stocks are plentiful) have been moving toward the USEC recently. Current distillate fuel imports have been ramping up over the last several weeks and are running above last year’s levels for the same timeframe. In addition with the US exporting over 1.3 million barrels per day of diesel there is ample supply that could be downgraded to heating oil and shifted to the USEC if the requirement is there and the economics make sense.

Finally, unlike the Nat Gas or Propane markets the US does have a strategic home heating oil reserve. The Northeast Home Heating Oil Reserve… managed by the DOE currently has 1 million barrels of heating oil split equally between two locations… Groton, Ct and Revere, Ma. If needed… supplies would quickly be released by the DOE. So far this has not happened this winter. The last time the reserve was used was in 2012 after Hurricane Sandy hit the east coast.

Since the run-up in prices over the last four or five days of the expiring February HO contract the new spot March contract is currently trading about $0.29/gal or 8.8 percent below the high hit on expiration day (Jan 31st) of the February Nymex contract. Since March has become the spot contract the market has been trading in a tight sideways range for the last four sessions.

With two months left to the official winter heating season (and what many would say the worst of the winter is now in the history books) it currently looks like heating oil prices going forward are not likely to move into a sustainable surge mode unless the market is hit with yet another extended arctic blast and/or unforeseen refinery problems emerge during the remainder of the first quarter.