Quote of the Day
What's well begun, is half done.
The market is adding to yesterday’s modest gains as the East Coast digs out from yet another massive snowstorm ahead of what is shaping up to be a couple of weeks of arctic cold encompassing the eastern half of the U.S. The oil complex (NYMEX:CLG14) has been taking its directional cues from the fundamental side of the ledger with market participants not focusing very much on the externals (direction of equities and the U.S. dollar (NYBOT:DXH14)… which are mixed of late).
Over the last 24 hours we are once again seeing the first/second month Nymex HO (NYMEX:HOG14) backwardation starting to widen again after a light round of profit taking selling yesterday afternoon. Market participants are looking at the potential for bitterly cold temperatures for the next several weeks that will result in an above average call on both heating oil and Nat Gas related heating requirements along the eastern half of the U.S.
Heading into another round of arctic temperatures, inventory levels of both distillate fuel and Nat Gas are below last year and the so-called normal five-year average. To the extent that the cold materializes it should keep refinery utilization rates in the U.S. above the 90% level as refineries continue to max distillate production for heating needs as well as for exports (diesel).
Also the gasoil/HO economic arb between Europe and the U.S. East Coast is widening, which should result in additional supplies heading across the Atlantic. To the extent that the upcoming cold spell is limited to a few weeks, overall heating oil supplies should be adequate. That said, propane supplies in the Midwest are tight so far this winter and likely to remain tight as long as cold weather continues to move down from the arctic.
Yesterday’s IEA monthly fundamental oil report was bullish as was the EIA forecast issued earlier in the month. Demand is projected to pick up while OECD inventories are heading toward the lower end of the normal operating range and expected to stay at a below normal level through 2015. As I have been discussing in the newsletter for weeks, there has been a contingency of market participants that have been projecting a surplus of oil forming in the U.S. Gulf as more oil is moved from the mid-west.
In the short- to medium-term there are no signs suggesting that a surplus will be forming anytime soon. In fact U.S. oil inventories (including those in the Gulf Coast) remain well below last year and the so-called normal five-year average. Over the longer term there is certainly the possibility of the Gulf Coast being oversupplied as more and more oil is moved from the Midwest as well as from the Permian basin.
However, a surplus situation will be very dependent on several factors. First and foremost how oil demand growth evolves in the U.S. Demand has been stabilizing and actually growing as the U.S. economy is gaining its footing and seems to be in a sustainable growth pattern. Second the whole issue of, will the U.S. government allow blanket crude oil exports from the U.S.? I do not expect the current crude oil export laws will materially change in the short- to medium-term.