All good news for energies?

August 27, 2014 05:50 AM
Weekly Energy Markets Analysis

The crue oil (NYMEX:CLV14) complex is in positive territory for the third day in a row and ahead of this morning’s EIA fundamental snapshot.

Yesterday afternoon’s API oil inventory report was supportive for crude oil and gasoline (NYMEX:RBV14) but bearish for distillate fuel (see below for more details). That said the overall global fundamentals remain biased to the bearish side while the geopolitical events around the world are still putting a macro floor in prices.

The spot WTI contract is hovering near its technical range resistance level as the industry is expecting the EIA to also show a draw in crude oil stocks after the surprise draw reported in the API report last evening. Even Cushing stocks increased less than the industry was expecting providing a modicum of support so far this morning.

Activity is picking up in the tropics with Hurricane Cristobal heading north into the Atlantic but not expected to make landfall anywhere in the United States. Insofar as oil and Nat Gas (NYMEX:NGV14) supply is concerned this hurricane is a non-event. In addition there are now two low probability events forming in the tropics. One event currently has little if any chance of strengthening over the next forty eight hours and is still about 900 miles east of the Lesser Antilles.

Another weather event has formed in the Gulf of Mexico and currently has only a 10 percent chance of forming into a tropical cyclone over the next forty eight hours. This event is disorganized with thunderstorms over the northern Gulf of Mexico are associated with a trough of low pressure.  Upper-level winds are not expected to be conducive for significant development while the system moves to the west-southwest at 5 to 10 mph.

So far none of these events are currently impacting oil and/or Nat Gas producing operations but activity is picking up as we move into the more active part of the tropical weather season. As I have indicated it is time to keep the tropics on our daily radar.

Global equity market ended the last twenty four hour period basically unchanged. The EMI Global Equity Index is still showing a year to date gain of 8.2 percent or the highest level of the year so far. Only Japan remains in negative territory for the year but well off of its lows hit earlier in the year. Brazil moved back into the top spot on the leader board with Canada still a close second. Both are showing double digit gains for the year. Global equities have been a positive price directional driver for the oil complex but mostly offset by the rising US dollar trend that has been in play since the middle of August.

Tuesday's API report was mixed with draws for crude oil and gasoline and a surprisingly large build for distillate fuel. It was biased to the bullish side for crude and gasoline but bearish for distillate. Crude oil imports decreased by 94,000 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 lower on the week.

The oil complex is 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 1.3 million barrels versus a market expectation for a modest build. On the week gasoline stocks decreased by 3.2 million barrels versus the market forecast for a smaller draw while distillate fuel stocks increased by 2.4 million barrels versus expectations for a small draw.

The API reported Cushing crude oil stocks increased by 0.265 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 slightly bullish 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 seasonal draw in gasoline and small build in distillate fuel inventories.

I am expecting crude oil stocks to increase by about 2 million barrels with total inventories still 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 2.5 million barrels while the overhang versus the five year average for the same week will come in around 6.8 million barrels.

I am expecting crude oil inventories in Cushing, Ok inventories to increase modestly even as the outflow from Cushing increased strongly but offset by a reduction in demand as a result of the Coffeyville refinery shut down.  Run rates in the PADD 2 region have receded from the highs hit several weeks ago resulting in refinery demand for crude oil in the region leveling off for the moment.

The TransCanada (Keystone) Gulf Coast line increased its pumping rate for the week ending August 22nd. The line is above the 200,000 bpd level for the week ending Aug 22md. Genscape is reporting a flow of 256,389 bpd or an increase of 84,216 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 0.8 million barrels more than the previous week. Flow from Seaway increased modestly by 64,818 bpd adding to the increase in outflow from Cushing suggesting that this week’s inventory level in Cushing should show the first draw after three weeks of builds based solely on the current pipeline data. The inflow into Cushing decreased while the outflow increased strongly.

According to the latest data from Genscape (for more information on Genscape data products visit their website) the pipeline outflow from Cushing increased strongly last week as the Keystone Gulf Coast line also increased last week. For the week ending Aug 22nd total net outflow from Cushing increased by an average of 213,620 bpd (mostly due to an increase on both the Keystone Gulf and Seaway pipelines). Seaway pipeline increased modestly and averaged 329,765 bpd for the week ending Aug 22nd and is now above the 300,000 bpd level. The inflow into Cushing decreased slightly by 16,614 bpd. The Hawthorn pipeline decreased slightly as less trains moved into Stroud.

I am expecting a build of crude oil stocks in PADD 3 (Gulf) as refinery run rates decrease. 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 2 percent to 70 percent utilization level. On the other hand Cushing stocks are now running at 25 percent of workable capacity as Cushing inventories have started to build over the last several weeks. With crude oil demand in the region starting to flatten we could see inventories starting to build once again.

With refinery runs expected to decrease by 0.1 percent I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.2 million barrels which would result in the gasoline year over year deficit coming in around 5.7 million barrels while the surplus versus the five year average for the same week will come in around 0.5 million barrels.

Distillate inventories are projected to decrease by 0.3 million barrels as exports of distillate fuel out of the US Gulf continue while heating demand is still 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 7.8 million barrels below last year while the deficit versus the five year average will come in around 28.6 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 in directional sync with the projections. If the actual data is in line with the projections there will be small changes in the year over year inventory comparisons for everything in the complex.

I am maintaining my oil view at cautiously bearish and maintaining my bias at cautiously bearish as crude oil failed to remain in its trading range. 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 Nat Gas view at neutral and maintaining my bias at cautiously bearish as the spot contract is still in the lower technical trading range as of this morning. That said the market is approaching the upper technical range resistance area and could be tested as early as today. The September Nymex contract is in a lower trading range with the support level of $3.72/mmbtu and the resistance end at the $3.94/mmbtu.

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




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