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.