What are we waiting for? Volume in the oil market seems to suggest that the passion for making big trades is somewhat subdued. Could it be that we are waiting for a resolution to the US Presidential election or could it be as simple as the fact that we are in the heart of the shoulder season, after summer and before the start of winter. I think it is all of that but also the market is trying to find the balance between the bullish aspects of some recent better than expected economic data versus the negative impact of dwindling prospects for more dramatic economic stimulus going forward.
China’s data overnight is a perfect example. China’s gross domestic product expanded 7.4%, hitting 2.2% in the third quarter. While the number initially should improve oil demand expectations, some may worry that China’s warning about the possibility of renewed inflation may temper previous market expectations that China would have to act aggressively to juice up its slowing economy.
Of course the fate of China’s economy may not totally be in their hands as they count on Europe to buy their goods. The euro has rallied on the expectations that Spain will ask for a bailout. European leaders are going to be meeting in Brussels and their rhetoric may be a market moving event. While they are trying to downplay expectations of any major announcements at this meeting, based on this morning’s strong Spanish bond auction, the market is saying they expect not to be disappointed.
We also saw shockingly good housing starts and markets that rallied like lumber and copper, along with rising US yields. Yet oil was more focused on what looks almost like a glut of US crude supply. The Energy Information Administration reported that U.S. commercial crude oil inventories increased by 2.9 million barrels from the previous week. At 369.2 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. This build came on the back of imports that averaged over 8.3 million barrels per day last week, up by 126 thousand barrels per day from the previous week.
Yet at the same time a drop in distillates and a rise in gasoline supply had the "widow-maker," or the seasonally inspiring rollercoaster, long heating oil versus short gasoline spread absolutely explode. The Energy Information Administration reported that gasoline production increased last week, averaging more than 9.0 million barrels per day exceeding their demand estimate of 8.7 million barrels per-day. This helped the supply rise by 1.7 million barrels, which was led by what the EIA says was a dramatic increase in blending components. Yet at the same time we are seeing almost disturbingly tight supply of distillate. The EIA reported that distillate fuel inventories decreased by 2.2 million barrels last week and are below the lower limit of the average range for this time of year. Hi grade ultra-low-sulfur diesel stocks are a whopping 12.4 deficit from tear ago supplies after they tanked falling by 3.5 million barrels a week ago. Is it any wonder why the “widow-maker” spread is rocking?
I know we talk a lot about shale gas but what about shale propane? The EIA reports in their “Energy Today” note that propane inventories (including propylene) in the United States finished September 2012 at a record high level of 75.6 million barrels, while the average weekly spot price for propane sold from storage facilities in Mont Belvieu, Texas was at its lowest level since the third quarter of 2009. During the third quarter of 2012, U.S. propane inventories rose by almost 22%.
While seasonal increases are not unusual because of reduced demand resulting from warmer weather, the steady climb in inventory levels this year is more likely the result of increased production. Propane supply in the United States (the weekly refiner, blender, and gas plant net production of propane - including propylene - plus additional net inventories, minus net exports) averaged 1.24 million barrels per day for the third quarter, 13.4% more than third-quarter average demand. Third-quarter average weekly supply was 5.3% above second-quarter levels, despite an 8.0% quarter-on-quarter drop in the average weekly Mont Belvieu spot price. From January 2012 through July 2012, the United States exported an average of 0.16 million barrels per day, while importing an average of 0.13 million barrels per day. The United States has not been a net exporter of propane and propylene since the EIA and U.S. Bureau of the Census trade data series began in 1973.
The EIA says that propane can be separated from natural gas at natural gas processing plants, or from crude oil at refineries. The increased levels of propane production and supply and the resultant increase in inventory appears to be less in response to propane prices and more as a result of increased natural gas production. Propane is a byproduct of shale gas production at fields containing wet gas—or, a high volume of natural gas liquids (NGL)—such as the Eagle Ford play in south Texas, where operators target a combination of crude oil, condensate and NGL. The supply and inventory increases for propane are most likely driven by producers responding to lower natural gas prices by increasingly focusing their production on wet fields, which are more profitable right now than dry gas production. The Gulf Coast region (PADD 3) accounted for 60%, or 7.4 million barrels, of the 12.4 million barrel rise in third-quarter propane inventories, placing downward pressure on Mont Belvieu spot prices.