Fundamentals…fundamentals…fundamentals continue to drive the direction of energy prices. Before I delve into the energy sector just a mention that Wednesday’s activity on the equity side was uneventful. However the Dow was able to put in its longest winning streak of up days in a row in a long time…2 days and barely up today. In any case equities were neutral on the day but the dollar was not. The dollar weakened adding further pressure on oil prices. However, the big storyline of the day was another mostly bearish weekly inventory report on the heels of a bearish EIA Short Term Energy Outlook report released on Tuesday.
As shown in the following table as expected the report was filled with surprises. Crude oil inventories built a little over 700,000 barrels on the week versus an expectation for a modest decline of 500,000 barrels. Crude oil stocks are now almost 46 million barrels above last year and 42 million barrels above the more normal same week, 5 year average. On a positive note for crude oil Cushing, Ok stocks decreased modestly for the 4th week in a row.
On the refined product side all surprise. Gasoline stocks declined significantly more than expected bringing the year on year deficit to almost 22 million barrels. On the other side of the barrel distillate stocks built way more than any of the forecasts bringing the year on year overhang to almost 28 million barrels while the 5 year average surplus increased to almost 27 million barrels. Distillate stocks are at the highest level since 1983. This week’s distillate number was exceptionally bearish since both HO & diesel fuel inventories increased. The bigger surprise was the big increase of well over 1 million barrels of HO during a week when the weather along the Northeast was much colder than normal and a significant snowstorm gripped the area.
At least the refiners are still trying to constrain supply and decreased runs a bit after cracks declined most of last week. On the demand side only distillate and jet showed a small increase while gasoline & the total declined strongly on the week. Total demand is still running almost 6% below last year and almost 7% below the 5 year average.
Oil Inventory
3/11/09
Mil of Bbls
Current
Change from
Change from
Change from
Inv.
Last Week
Last Year
5 Year
Crude Oil
351.3
0.7
45.9
42.0
Gasoline
212.5
(3.0)
(21.8)
(7.5)
Distillate
145.4
2.1
27.8
26.6
Refinery %
82.7%
-0.4%
-3.2%
-4.0%
Demand
Total
18892
(685)
(1189)
(1345)
Gasoline
8972
(232)
(159)
(100)
Distillate
3784
20
(236)
(411)
Jet Fuel
1385
98
(370)
(282)
The following table summarizes the whole weekly fundamental picture in a simple manner along with my view of the individual products. The table is the difference between this week’s numbers and last week for each of the main elements of the EIA report. I converted everything (including the change in inventories) to thousands of barrels per day. The data is not meant to be additive. As shown my view of crude oil is bearish as domestic production, imports and inventories all increased while total demand declined. Distillate production surprisingly increased as did imports and inventories resulting in a bearish bias. Jet was mildly bullish. Gasoline was the only bright spot in the report showing a significant decline in production and inventories tempered a bit by an increase in imports and a reduction in implied demand.
Week to Week Change - Oil Fundamentals
Thousands of Barrels per Day
Crude
Gasoline
Distillate
Jet
Domestic Production
28
(464)
155
(81)
Imports
93
87
8
(12)
Exports
0
See Note
See Note
See Note
Inv Build/(Draw)
107
(428)
301
(18)
Implied Demand
(685)
(232)
20
98
EMI View
Bearish
Bullish
Bearish
Bullish
Note: Product Exports are total for all products
56
Overall I would rate the report as bearish and one OPEC should look over very carefully before heading into their meeting on Sunday. So far all of the fundamental information emerging this week has been bearish. The last major oil fundamental report comes out on Friday morning when the IEA releases their monthly oil report (which I expect will agree with the EIA report and be bearish). OPEC will have to cut production once again if they expect prices to emerge out of the trading range that has been in place for months.
As shown in the EMI Forward Curve Watch table below the bearish inventory report pushed both the crude oil and HO forward curves deeper into contango. Crude oil is almost back to where it was on Dec 17th while HO is in a deeper contango that on Dec 17th. Gasoline has emerged as the only oil commodity to experience a major transition in the shape of its forward curve form contango to backwardation. Interestingly and a message to OPEC… inventories for all three oil commodities are noticeably higher in the US than where they were on Dec 17th with crude oil leading the way growing by 30 million barrels since the reference date.
EMI Forward Curve Watch
Active
Negative Spread = Contango
Positive Spread = Backwardation
17-Dec
Current
Change
Change
NYM WTI, $/bbl
OPEC Meet
vs 12/17
vs yesterday
Apr,09/Dec, 10
($13.87)
($13.16)
$0.71
($1.98)
US Crude Inv.
321.3
351.3
30.0
NYM HO, $/Gal
Apr,09, Feb,10
($0.2345)
($0.2630)
($0.0285)
($0.0145)
US Distillate Inv.
133.5
145.4
11.9
NYM RBOB, $/Gal
Apr,09, Feb,10
($0.0735)
$0.0087
$0.0822
$0.0038
US Gasoline Inv.
203.9
212.5
8.6
NYM NG, $/mmbtu
Apr,09, Feb,10
($1.740)
($1.899)
($0.159)
$0.012
US Nat Gas Inv.
3,020
1,793
(1,227)
OPEC’s objective is to stabilize prices by reducing the global overhang of inventories. So far that has not occurred in the US or in floating storage which could be as high as 80 million barrels. OECD inventories are also at the very upper end of the normal range. If OPEC does not announce two things…stricter adherence to the cuts already in place and a new cut of upwards of 1 million barrels a day effective April 1 prices will quickly fall back to the lower end of the trading range (low $30’s basis WTI) and remain there for an extended period of time.
Nat Gas continues in a solid downtrend with prices now looking like they will test the $3.50/mmbtu level in the near future. Today’s inventory report could prove to help this along if it comes in like HO inventories did this week. Coming off last week's 102-Bcf net natural gas withdrawal, forecasts for this week's figure from the EIA are again wide, spanning a 50-Bcf range and reflecting the market's ongoing uncertainty against a backdrop of rapidly changing fundamental factors.
Estimates for this week's with data covering the week ending March 6 -- span anywhere from -60 Bcf up to -120 Bcf with most forecasts leaning towards the higher end of the range at 100-105 Bcf.
Despite the gaping spread of expectations, however, most current forecasts are above the five-year average (-91 Bcf) as well as the year-ago figure (-87 Bcf) for this week, which means the wide surpluses in the market could be given pause this week, which in turn could give pause to the market's downslide. Through February 27, total inventories in the lower 48 states were at 1,793 Bcf, now 270 Bcf above last year's level for the same week and 218 Bcf above the five-year average of 1,575 Bcf.
My view and my recommendations remain the same. Long gasoline and short everything else still remains the spread of choice. Hedgers should remain cautious but cognizant that OPEC is likely to cut production again on Sunday.
Currently prices are mixed.
