Roller coaster ride for WTI?

Weekly energy market analysis

Since breaching the $100/bbl level yesterday afternoon the spot Nymex WTI (NYMEX:CLJ14) contract has been steadily declining. The spot contract is off another 1.2% so far this morning. The market is finally acknowledging that the destocking of crude oil inventories in Cushing is resulting in a surplus building in the Gulf or PADD 3 region. I have been discussing this issue for several months in this newsletter and in our Energy Insight Blog “The Big Shift”.

As of last week’s EIA oil inventory report crude oil stocks in the Gulf are above last year and the five year average with the spring refinery maintenance season barely getting underway. Last night’s API report showed a larger than expected build in total crude oil stocks of 2.6 million barrels. Later this morning the EIA will release their report with a PADD breakdown. I am expecting another above average build in PADD 3 again this week.

The direction of WTI is primarily driven by the short term fundamentals with more and more market participants starting to recognize that it is not a question as to will a crude oil surplus build in the U.S. Gulf, rather how large will the surplus be and how long will the region remain in a surplus position. As the refining sector moves into the heart of the lower crude oil demand refinery maintenance season the surplus will only grow and likely grow at an accelerated rate.

As I have also warned the Brent/WTI spread is being impacted by the so called “Big Shift” as WTI has been in a downward trending pattern while the Brent contract has been much more stable. Until the refinery maintenance season is over in a few months or so the spread will have difficulty in working its way toward a more normal historical relationship that existed prior to the surplus years in the Cushing region.

The April spread has now breached the $8/bbl technical resistance area that has been in play since the middle of February. The spread is now looking like it will settle into an $8/bbl to $11/bbl trading range for the short term. The direction of the spread has been consistently moving in the inverse direction of the spot WTI contract as the Brent contract has remained relatively stable.

In fact the Brent (NYMEX:SCJ14) contract has been in a technical triangular or consolidation trading pattern while the WTI contract has been in a downtrend over the same timeframe. Brent is garnering support from the ongoing and evolving geopolitical issues in places like Libya, Ukraine and elsewhere in the MENA region as well as market participants starting to look forward to the North Sea maintenance season which will result in reduced supply of North Sea crude oil.

In the short term I expect the spread to remain with a bias toward widening while longer term the narrowing pattern should return.

Global equity markets are continuing to drift lower with the EMI Global Equity Index now at the lowest level of the year erasing all of the recovery gains over the last several weeks. The EMI Index is now showing a year to date loss of 5.9% with seven of the ten bourses in the Index now in negative territory. Although Brazil was the only bourse to add value over the last twenty four hours it is still the worst performing exchange in the Index. Canada remains on top of the leader board but if oil prices continue to slide Canadian equities are likely to get hit. Global equities have been a negative price driver for the oil markets as well as the broader commodity complex. The US dollar Index continues to move higher and is also acting as a negative price driver for oil and commodities. 

The EIA released their latest Short Term Energy Outlook yesterday. Following are the main oil highlights from the report. In this month’s report they lowered their forecast for global demand by 100,000 bpd but also lowered their global supply projection by 300,000 bpd.

  • EIA projects world petroleum and other liquids supply to increase by 1.3 million barrels per day (bbl/d) in both 2014 and 2015, with most of the growth coming from countries outside of the Organization of the Petroleum Exporting Countries (OPEC). The Americas, in particular the United States, Canada, and Brazil, will account for much of this growth.
  • Harsh winter conditions over the past few months negatively affected well completion activity in the northern U.S. plays. As more evidence of this seasonal slowdown has appeared in the data, EIA has revised downward initial estimates for December 2013 and January 2014 U.S. crude oil production. Because the weather effects are temporary, much of the production slowdown is expected to be made up by accelerated completion activity over the next few months.
  • EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.5 million bbl/d in 2013 to 8.4 million bbl/d in 2014 and 9.2 million bbl/d in 2015. The highest historical annual average U.S. production level was 9.6 million bbl/d in 1970.
  • Projected world liquid fuels consumption grows by an annual average of 1.2 million bbl/d in 2014 and 1.4 million bbl/d in 2015. Countries outside the Organization for Economic Cooperation and Development (OECD), notably China, drive expected consumption growth. Non-OPEC supply growth contributes to an increase in global surplus crude oil production capacity from an average of 2.1 million bbl/d in 2013 to 3.9 million bbl/d in 2015.
  • EIA estimates that global consumption grew by 1.2 million bbl/d in 2013, averaging 90.4 million bbl/d for the year. EIA expects global consumption to grow 1.2 million bbl/d in 2014 and 1.4 million bbl/d in 2015. Projected global oil-consumption-weighted real GDP, which increased by an estimated 2.3% in 2013, grows by 3.1% and 3.5% in 2014 and 2015, respectively.
  • EIA estimates that OPEC crude oil production averaged 30.0 million bbl/d in 2013, a decline of 0.9 million bbl/d from the previous year, primarily reflecting increased outages in Libya, Nigeria, and Iraq, and strong non-OPEC supply growth. EIA expects OPEC crude oil production to fall by 0.5 million bbl/d and 0.3 million bbl/d in 2014 and 2015, respectively, as some OPEC countries, led by Saudi Arabia, reduce production to accommodate the non-OPEC supply growth in 2014.
  • EIA expects that OPEC surplus capacity, which is concentrated in Saudi Arabia, will average 2.6 million bbl/d in 2014 and 3.9 million bbl/d in 2015. This build in surplus capacity reflects production cutbacks by some OPEC members adjusting for the higher supply from non-OPEC producers. These estimates do not include additional capacity that may be available in Iran but is currently offline because of the effects of U.S. and European Union sanctions on Iran's oil sector.
  • EIA estimates that OECD commercial oil inventories totaled 2.59 billion barrels by the end of 2013, equivalent to roughly 56 days of consumption in that region. Projected OECD oil inventories rise to 2.61 billion barrels at the end of 2014 and 2.62 billion barrels at the end of 2015.

Wednesday's API report was neutral to bearish as total crude oil stocks increased more than the expectations while refined product inventories were declined mostly within the expectations. The build in crude oil is primarily related to the an increased in crude oil imports as well as the shifting of crude oil from Cushing down to the Gulf. The API reported a slightly larger than expected draw in gasoline and an expected draw in distillate fuel. Total inventories of crude oil and refined products were slightly lower on the week.

The oil complex is mostly lower as of this writing 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.

Crude oil stocks increased by 2.6 million barrels.  On the week gasoline stocks decreased by about 2.2 million barrels while distillate fuel stocks decreased by about 0.8 million barrels. Refinery utilization rates decreased by 0.3% suggesting the spring maintenance season may be starting to get underway.

The API reported Cushing crude oil stocks decreased below the expectations by 1.3 million barrels for the week. 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 neutral for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil stocks as the restocking process continues for the eight week in a row. I am also expecting a modest draw in gasoline inventories and in distillate fuel last week with refinery run rates starting to decline.

I am expecting crude oil stocks to increase by about 2.4 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 15.2 million barrels while the overhang versus the five year average for the same week will come in around 12.1 million barrels.

I am expecting crude oil inventories in Cushing, Okla., to show the seventh weekly stock decrease in a row as the Keystone Gulf Coast pipeline is continuing to slowly ramp up its pumping rate. I would expect the Cushing stock decline to be in the range of around 2 million barrels based on the fact that more oil was moved out of Cushing to the USGC on Keystone last week.

In fact the Keystone Gulf Coast line increased its pumping rate for the fifth week out of the last six weeks. Genscape reported an average flow of 308,751 bpd for last week (report period for this week’s inventory report) as the line continues to work its way up to full operating capacity. The Keystone Gulf Coast Line is impacting the crude oil storage levels in Cushing and should result in Cushing stocks consistently declining going forward. Last week alone the Keystone line moved about 2.2 million barrels of crude oil out of Cushing. This will be bearish for the Brent/WTI spread this week. I am also expecting an above normal build of crude oil stocks in PADD 3(Gulf) of over 2 million barrels.

With refinery runs expected to decrease by 0.2% and wit the industry working down its stocks of winter grade gasoline I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.8 million barrels which would result in the gasoline year over year surplus coming in around 0.7 million barrels while the surplus versus the five year average for the same week will come in around 1.6 million barrels.

Distillate inventories are projected to decrease by 1 million barrels as exports of distillate fuel out of the US Gulf continue while heating demand last week was above normal on cold winter weather along the east coast. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 6.9 million barrels below last year while the deficit versus the five year average will come in around 28.5 million barrels.

I am adjusting my oil view and bias to cautiously bearish but I am still flying the caution flag as the situation in the Ukraine continues to unfold. Most of the commodities in the oil complex have breached their respective technical support levels and are moving into new, lower trading ranges.

I am maintaining my Nat Gas (NYMEX:HPJ14) view and bias at neutral as the market sentiment seems is shifting away from the winter weather trading mode. The Nat Gas market is exhibiting all of the signs of a market establishing yet another market top.

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