Crude conundrum

Weekly Energy Markets Analysis

Crude oil prices have been struggling to hold above the breakout point for both the WTI (NYMEX:CLQ14) and Brent (NYMEX:SCQ14) contract after declining and settling below their respective support levels yesterday.

The complex is starting the session mixed with WTI trading either side of unchanged, Brent showing a small gain and RBOB (NYMEX:RBQ14) gasoline in negative territory after a much larger than expected build in gasoline inventories reported by the API late yesterday afternoon. The API data was overall bearish and if the EIA data is in sync this morning it could suggest that demand may be starting to taper in the United States.

Brent has appreciated versus WTI since yesterday on news that Libyan oil production is slipping and is now below the highs hit last week. Production has dropped to 450,000 bpd after hitting a high of about 600,000 early last week as clashes between Islamic militants and regular forces have escalated in recent days. In spite of a 1.4 million barrel draw in Cushing stocks reported in the API report the geopolitical risk out of Libyan has once again taken center stage insofar as the short term direction of the spread.

On the Ukrainian front the EU is ready to potentially add technical and financial sanctions against Russia after the downing of the Malaysian airline. So far none of the sanctions have led to any interruptions in the flow of oil out of Russia nor Natural Gas flow through the Ukraine.

The National Hurricane Center is showing that Tropical Storm Two is continuing to move west and expected to arrive in the Caribbean area around Thursday. So far this weather event is still only projected to remain a Tropical Depression through Thursday. It is still too early to determine if this storm will strengthen to a hurricane and work its way to the oil and Nat Gas producing area of the Gulf of Mexico.

Global equities added value over the last twenty four hours with gains coming from most of the bourses in the Index. The EMI Global Equity Index gained 0.51 percent over the last twenty four hours resulting in the year to date gain widening to 6 percent or the best level of 2014 (so far). There are eight of the ten bourses in the Index in positive territory with Brazil now the best performing bourses in the Index. Japan and China remain the two bourses that are still in negative territory for 2014. Global equities have been a positive price directional 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 gasoline. Crude oil imports increased strongly by 550,000 bpd into the United States 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 higher 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 0.6 million barrels and less than the market expectations. On the week gasoline stocks surged by 3.6 million barrels versus the market forecast for a much smaller build while distillate fuel stocks increased by 2.5 million barrels and above the expectations.

The API reported Cushing crude oil stocks decreased by 1.4 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 builds in both gasoline and distillate fuel inventories.

I am expecting crude oil stocks to decrease by about 2.5 million barrels with the total inventories well off of their 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 8.3 million barrels while the overhang versus the five year average for the same week will come in around 14.1 million barrels.

I am expecting crude oil inventories in Cushing, Okla., to decrease as the outflow from Cushing decreased only slightly with the inflow deceasing strongly last week.  A high level of run 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 bearish for the Brent/WTI spread.

The TransCanada (Keystone) Gulf Coast line decreased its pumping rate for the third week in a row. The line remains below the 300,000 bpd level for the week ending Jul 18th. Genscape is reporting a flow of 255,822 bpd or a decrease of 12,655 bpd compared to the previous week. Last week the Keystone line moved about 1.8 million barrels of crude oil out of Cushing or about 0.1 million barrels less than the previous week. Flow from Seaway increased slightly by 7,426 bpd suggesting that there is likely to be a small draw in Cushing stocks based solely on the current pipeline data. The inflow into Cushing decreased more 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 decreased slightly as the Keystone Gulf Coast line also decreased last week. For the week ending Jul 18th total net outflow from Cushing decreased by an average of 9,338 bpd (mostly due to a decrease on the Keystone Gulf pipeline). Seaway pipeline increased and averaged 332,640 bpd for the week ending Jul 18th and remains above the 300,000 bpd level. The inflow into Cushing increased by 76,239. The Hawthorn pipeline increased modestly as trains moved into Stroud.

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 working storage capacity in PADD 3 crude oil inventories decreased 1.0 percent to 72.4 percent utilization level. On the other hand Cushing stocks are now running at only 25 percent of workable capacity as the destocking of Cushing inventories continues. With crude oil demand in the region continuing to remain robust and picking up we have seen the highs in inventories in the PADD 3 area already.

With refinery runs expected to increase by 0.3 percent I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year deficit coming in around 7.2 million barrels while the deficit versus the five year average for the same week will come in around 1 million barrels.

Distillate inventories are projected to increase by 2 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 0.2 million barrels below last year while the deficit versus the five year average will come in around 19.1 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 adjusting my oil view to neutral and keeping my bias at cautiously bearish as crude oil failed to hold in the new breakout trading range. The short covering rally seems to have slowed and the market sentiment seems to be shifting back toward bearish. 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 in spite of the several geopolitical events around the world.

I am maintaining my Natural Gas (NYMEX:NGQ14) view and my bias at cautiously bearish as Nat Gas prices have fallen out of bed and have moved into another lower trading range. Last week’s bearish injection report sent the market below the $4/mmbtu level and is now trading in another new lower range. The August Nymex contract is in a new lower trading range with the support level of $3.60/mmbtu and the resistance end at the $3.95/mmbtu.

Markets are mostly higher heading into the U.S. trading session as shown in the following table.


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