Quote of the Day
Now, we have inscribed a new memory alongside those others. It’s a memory of tragedy and shock, of loss and mourning. But not only of loss and mourning. It’s also a memory of bravery and self-sacrifice, and the love that lays down its life for a friend – even a friend whose name it never knew.
George W. Bush
With Obama backing down and opting for a test of the diplomatic solution that emerged yesterday, Syria is starting to move into the background as a short term price driver for the oil complex. Obama asked the U.S. Congress to postpone its vote and allow time for diplomacy to work. For now President Obama dodged a bullet in not having to get involved militarily in Syria… a very unpopular course of action among the American public as well as the international community.
Oil prices (NYMEX:CLV13) have shed a major portion of the Syrian risk premium with the spot Brent contract declining over $6/bbl since peaking in late August. The spot WTI contract shed about $5/bbl over the same timeframe. The oil complex is now back to focusing on the main underlying support for current prices — the plethora of supply disruptions that have been plaguing the complex for the last several months. Below is a good summarization and several charts that the EIA has issued that puts the supply problems in focus. With Syria out of the news cycle for the moment oil prices are likely to stabilize and not enter into a major decline in the short term.
Yesterday the EIA released it latest Short Term Energy Outlook Report (STEO). Following are the main oil highlights.
- An increase in unplanned liquid fuels production disruptions in August combined with peak summer demand and exacerbated by rising concerns over the conflict in Syria and its regional implications, contributed to a tighter world oil market during the month. The total volume of world production that is offline because of unplanned outages among OPEC and non-OPEC producers in August was the highest since at least January 2011 (see STEO Supplements EIA Estimates of Crude Oil and Liquid Fuels Supply Disruptions and Status of Libyan Loading Ports and Oil and Natural Gas Fields). Liquid fuels production disruptions in August reached 2.7 million bbl/d, with 2.1 million bbl/d of crude oil production outages from OPEC producers. This level of crude oil production outages among OPEC producers is the highest since at least January 2009, when EIA began tracking OPEC outages.
- Growing non-OPEC liquid fuels production contributes to a decline in the call on OPEC crude oil and global stocks (world consumption less non-OPEC production and OPEC non-crude oil production) falling from an average 30.0 million bbl/d in 2013 to 29.4 million bbl/d in 2014.
- EIA projects global consumption to grow by 1.1 million bbl/d in 2013 and by another 1.2 million bbl/d in 2014, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth. Projected OECD liquid fuels consumption declines by 0.2 million bbl/d in both 2013 and 2014. The declines in OECD consumption are largely due to lower consumption in Europe and Japan.
- Non-OECD Asia, particularly China, is the leading contributor to projected global consumption growth. EIA estimates that liquid fuels consumption in China will increase by 420,000 bbl/d in 2013 and by a further 430,000 bbl/d in 2014, compared with average annual growth of about 510,000 bbl/d from 2003 through 2012.
- EIA estimates that OECD commercial oil inventories at the end of 2012 totaled 2.65 billion barrels, equivalent to 57.7 days of supply. OECD oil inventories are projected to end 2013 at 2.66 billion barrels (57.3 days of supply) and end 2014 at 2.69 billion barrels (58.1 days of supply).
- EIA expects U.S. crude oil production to rise from an average of 6.5 million bbl/d in 2012 to 7.5 million bbl/d in 2013 and 8.4 million bbl/d in 2014. The continued focus on drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian basins is expected to account for the bulk of forecast production growth over the next two years. Offshore production from the Gulf of Mexico is forecast to average 1.3 million bbl/d in 2013 and 1.4 million bbl/d in 2014.
- Since reaching 12.5 million bbl/d in 2005, total U.S. liquid fuel net imports, including crude oil and petroleum products, have been falling. Total net imports fell to 7.4 million bbl/d in 2012, and EIA expects net imports to continue declining to an average of 5.4 million bbl/d by 2014. Similarly, the share of total U.S. consumption met by liquid fuel net imports peaked at more than 60% in 2005 and fell to an average of 40% in 2012. EIA expects the net import share to decline to 29% in 2014, which would be the lowest level since 1985.
Global equities have strongly embraced a diplomatic solution in Syria but were about unchanged over the last 24 hours after gaining strongly over the previous several sessions. The EMI Index is still showing a year to date gain of 1.7% and is back to mid-May levels. Only two of the bourses in the Index are in negative territory for the year… China and Brazil but both of these markets are well off of their worst levels of the year. Six of the 10 bourses in the Index are showing double-digit gains for the year with Japan still holding the top spot. Equities have been a positive price driver for the oil complex but offset somewhat by a relatively firm US dollar (versus most currencies).
There are now three events in the tropics — Tropical Storm Gabrielle… reenergized once again, Tropical Storm Humberto that is projected to strengthen into a hurricane over the next several days and a medium probability event around the Yucatan Peninsula. Gabrielle is now projected to take a northerly path along the U.S. east coast but far enough away from making landfall in the U.S. Tropical Storm Humberto is projected to move into the north Atlantic where it is likely to weaken back to a tropical storm. After moving north it is then projected to make a turn toward the west currently heading toward the U.S. It is still too early to determine if Humberto will be a concern for U.S. oil and Nat Gas operations in the Gulf of Mexico. The 30% event around the Yucatan Peninsula needs to be followed over the next day or so to see how it evolves. We will keep the tropics high on the radar list of events that could potentially have an impact on oil and Nat Gas production in the US Gulf and thus prices.
Tuesday's API report was mixed with a slight bullish bias. Total crude oil stocks decreased more than the expectations by 2.9 million barrels even as crude oil imports increased modesty as refinery run rates increased by 1.2%. The API reported a modest build in distillate fuel inventories and a draw in gasoline stocks that were within the range of the expectations.
The oil complex is higher as of this writing (see above reasons) and heading into the EIA oil inventory report to be released at 10:30 AM EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. On the week gasoline stocks decreased by about 0.2 million barrels while distillate fuel stocks increased by about 0.8 million barrels.
The API reported Cushing crude oil stocks decreased by 0.6 million barrels but at a slower pace than what has been the case over the last several months. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the Brent/WTI spread but as I have been discussing in the report the market is focusing more of its attention on supply interruptions and the evolving situation in Syria than the destocking of crude oil in the US Midwest.
My projections for this week’s inventory report are summarized in the following table. I am expecting a draw in crude oil inventories with a build in distillate fuel stocks and a modest draw in gasoline.
I am expecting crude oil stocks to decrease by about 2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 0.9 million barrels while the overhang versus the five-year average for the same week will come in around 16.7 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease modestly for the eleventh week in a row and continue its destocking trend but at a slower pace. This will be bearish for the Brent/WTI spread but with the geopolitical risk and supply interruptions in MENA Brent is still likely to widen versus WTI as the risk premium hits the Brent market more strongly.
Even with refinery runs expected to increase by 0.2% I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 1 million barrels which would result in the gasoline year over year surplus coming in around 16.3 million barrels while the surplus versus the five-year average for the same week will come in around 8.6 million barrels. With the U.S. summer driving season now in the history books, gasoline supplies are more than adequate going forward as total gasoline stocks remain well above both last year and the so called normal five year average.
Distillate fuel is projected to increase by 1.0 million barrels even as exports of distillate fuel out of the US Gulf remains robust. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2 million barrels above last year while the deficit versus the five year average will come in around 20.6 million barrels.
I am keeping my oil view and bias at neutral as the market continues to focus on Syria and the plethora of supply interruptions around the world but the immediacy of Syria has eased over the last 24 hours. Currently market participants are now in a wait and see mode as they try to determine when an attack takes place and what will be the response.
I am maintaining my Nat Gas view at neutral and keeping my bias at neutral after last week’s bearish weekly inventory report. The fundamental picture could once again shift if the temperatures across the U.S. does actually result in a significant increase in weather related Nat Gas consumption.
Markets are mostly higher heading into the U.S. trading session as shown in the following table.
Dominick A. Chirichella