Crude drifts lower

Weekly Energy Market Analysis

Crude oil (NYMEX:CLN14) prices are drifting lower as Libyan rebels announced that the government is now free to start pumping oil from the two eastern ports: EsSider and Ras Lanuf. These two ports would add about 500,000 bpd of oil exports from Libya. The market reaction is muted as the experience with Libya over the last year or so has been very inconsistent. This event is bearish for oil and bearish for the Brent/WTI spread if the ports remain open. The full market reaction is not going to come until market participants are convinced this is not just another short term event.

If the agreement holds in Libya and the two eastern ports remain open it will impact the Brent (NYMEX:SCN14) side of the spread much more so than WTI. The combination of Cushing stocks continuing it decline (1.3 million barrel draw reported in the API report last night… see next chart) coupled with a lot more low sulfur oil flowing from Libya should result in pushing the Brent/WTI spread well below the current level it is trading at. The spread has been in a long term narrowing pattern for most of this year with interruptions from time to time on geopolitical events and rounds of short covering. For the first half of 2014 the spread narrowed by about $5.40/bbl or 43.5 percent.

If the Libyan news is more than just words (as has been the case in the past) the August Brent/WTI spread should move relatively quickly to its next downside hurdle or support of around $5.25/bbl. From a technical perspective if the $5.25/bbl support is breached the next hurdle to breach on the way toward the spread returning to its normal historical trading level would be support around the $2/bbl level. Recall last year in the middle of July the spread traded with WTI at a premium to Brent or at its normal historical relationship. The conditions are improving for the spread to work its way toward normalcy as I have been projecting.

Finally, on Libya I am raising a very large caution flag on this news as these announcement have happened in the past only to either not be acted on and/or never last more than a few weeks. Approach this with caution and watch the news hitting the media airwaves on this subject.

We now have the first named storm as the U.S. National hurricane center is reporting Tropical Storm Arthur currently off of the eastern coast of Florida. The storm is no threat to oil and Natural Gas (NYMEX:NGN14) operations in the Gulf as the latest track has it heading up the east coast and strengthening into the first hurricane of the season sometime in the next day or so as it approaches the North Carolina coast.

Global equities rallied across the board over the last twenty four hours on the back of a strong rally in U.S. equities yesterday. The buying momentum continued overnight in Asia and into Europe. The EMI Global Equity Index increased by 0.48 percent with the year to date gain widening to 2.4 percent. The Index is higher by 0.7 percent for the week as all ten bourses in the Index added value over the last twenty four hours. Seven of the ten bourses in the Index are now in positive territory for the year.

Japan remains the worst performer in the Index but is now showing a significantly smaller year to date loss than it was just a few months ago. Canada is still at the top of the leader board with an 11.2 percent gain on the back of higher oil prices. If oil moves lower on the Libyan news it is likely to impact the Canadian equity market. Equities have been a positive price driver for the oil complex so far this week.

Tuesday's API report was biased to the bearish side for both crude oil and for refined products. Crude oil imports increased slightly by 85,000 bpd into the US with refined product exports from the US likely steady from the Gulf region. Total inventories of crude oil and refined products combined were higher on the week.

The oil complex is mostly lower (except WTI) 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 decreased by 0.9 million barrels and less than the market expectations. On the week gasoline stocks decreased by 0.4 million barrels and within my forecast while distillate fuel stocks increased strongly by 4.4 million barrels.

The API reported Cushing crude oil stocks decreased 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 build in Cushing in the EIA report. Directionally it is bearish for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest draw in crude oil stocks as refinery runs are expected to move higher. I am expecting a small draw in gasoline inventories ahead of the high demand holiday weekend in the US. Distillate fuel stocks are projected to increase on the week.

I am expecting crude oil stocks to decrease by about 2 million barrels with the total stock level well off of its record highs. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 2.3 million barrels while the overhang versus the five year average for the same week will come in around 17.4 million barrels.

I am expecting crude oil inventories in Cushing, Ok to decrease modestly as the outflow from Cushing increased last week.  A small increase in refinery utilization rates in the PADD 2 region is likely to result in an increase in crude oil demand and thus supportive of a draw in crude oil inventories in both PADD 2 and Cushing which is bullish for the Brent/WTI spread.

The Keystone Gulf Coast line increased its pumping rate modestly for the third week in a row. The line is back above the 300,000 bpd level for the week ending June 27th. Genscape is reporting a flow of 366,121 bpd or an increase of 35,640 bpd compared to the previous week. Last week the Keystone line moved about 2.6 million barrels of crude oil out of Cushing or about 0.3 million barrels more than the previous week. Flow from Seaway increased strongly by 128,378 bpd suggesting that there is likely to be a draw in Cushing stocks based solely on the current pipeline data. The inflow into Cushing increased by less than the outflow decrease.

According to the latest data from Genscape (for more information on Genscape data products visit their website) the pipeline outflow from Cushing increased slightly even as the Keystone Gulf Coast line increased last week. For the week ending June 27th total net outflow from Cushing increased by an average of 35,640 bpd (mostly due to an increase on the Seaway pipeline). Seaway pipeline averaged 238,781 bpd for the week ending June 27th and is still below the 300,000 bpd level. The inflow into Cushing increased marginally by 5,159. The Hawthorn pipeline decreased to zero flow versus the previous week.

I am expecting a modest draw of crude oil stocks in PADD 3 (Gulf) as refinery run rates increase. Following is the status of PADD 3 crude oil stocks compared to working storage capacity in the region. As shown in the table PADD 3 stocks are off of the record high levels hit a few weeks ago and are at 76 percent of storage capacity heading into this week’s number. With crude oil demand in the region starting to pick up we may have seen the highs in inventories in the PADD 3 area already.

With refinery runs expected to increase by 0.3 percent and with the industry starting preparing for the high demand July 4th weekend I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year deficit coming in around 9.1 million barrels while the surplus versus the five year average for the same week will come in around 0.3 million barrels.

Distillate inventories are projected to increase by 1.5 million barrels as exports of distillate fuel out of the US Gulf continue while heating demand is now basically non-existent. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 1.3 million barrels above last year while the deficit versus the five year average will come in around 17.1 million barrels.

The following table compares my projections for this week's report with the change in inventories for the same period last year. As you can see from the table last year's inventories are not in directional sync with the projections. If the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for everything in the complex.

I am maintaining my oil view at neutral and moving my bias to cautiously bearish on the Libyan news and as oil flow from Iraq still does not look like it is in jeopardy. In addition the market continues to show signs of having ample supply at the moment. So far there are no signs of any shortfalls of oil supply anyplace in the world.

I am maintaining my Natural Gas (NYMEX:NGN14) view at neutral and moving my bias cautiously bearish after last week’s higher than expected injection level and the likelihood of another triple digit injection in this week’s report. The August Nymex contract is close to breaching its trading range support level of $4.40/mmbtu. The August Nymex Natural Gas contract is still in the $4.40/mmbtu to $4.55/mmbtu trading range.

Markets are mostly lower heading into the U.S. trading session.



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