Crude Oil

Crude Oil Market

Slightly positive news from Europe on Wednesday and a huge draw reported in the latest EIA weekly oil inventories report were enough to move oil prices higher and WTI one step closer to the triple digit price level. The large draw was viewed as modestly bullish since a good portion of the draw was likely related to end-of-the-year LIFO inventory adjustments. With few important comments or news snippets hitting the media airwaves over the next week or so (due to the holidays), many risk asset markets could experience a continuation of the short covering rally started a few days ago.

The ongoing story of Iran and the broader Middle East (including Iraq now that the U.S. military is gone) will continue to act a put in the oil market with exposure for price spikes at any time. The geopolitics of the region will once again be on the radar and will from time to time act as the main price driver for the oil complex. There are enough geopolitical events evolving in Iran, Iraq, Egypt, Syria, Kazakhstan and Nigeria to suggest that over the medium, term supply issues could emerge. The most active at the moment are the protests in a major oil city in Kazakhstan that could impact oil flow and exports from that area while a major Shell pipeline spill in Nigeria has cut production of a 200,000 bpd export flow.

Weekly EIA Oil Inventories Report

The inventory report showed a modest build in total stocks, an as-expected build in distillate inventories, along with a huge build in gasoline stocks as implied demand was higher while refinery utilization rates declined strongly on the week to 85.1% of capacity a decrease of 2.6% in refinery run rates. The data are summarized in the following table along with a comparison to last year and the five year average for the same week.

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Total commercial stocks of crude oil and refined products decreased strongly on the week by 18.2 million barrels. The year-over-year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 38th week in a row. The year-over-year deficit widened to 41.3 million barrels while the overhang versus the five-year average for the same week came in around 5.1 million barrels.

Crude oil inventories decreased versus an expectation for a much smaller draw with a major decrease in PADD 3. With a decrease in stocks this week, the crude oil inventory status versus last year is still showing a wide deficit of around 17.1 million barrels while the surplus versus the five-year average for the same week narrowed to around 1.5 million barrels. PADD 2 stocks increased by 0.8 million barrels on the week while Cushing stocks declined by about 1 million barrels. Crude oil inventories in this region of the U.S. have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI price spread was trading at significantly lower levels. The price spread continues to trade in a trading range of between $9 to $11.50/bbl premium to Brent.

Distillate stocks decreased versus an expectation for a modest build. Heating oil/diesel stocks decreased by 2.4 million barrels as exports seemed to increase on the week. The year-over-year deficit widened to 21.6 million barrels while the five-year average deficit widened to about 4.3 million barrels.  With the economics and demand still likely to hold outside the U.S. and unless the upcoming winter heating season comes in much colder than any of the expectations, the current level of exports will likely continue.

Gasoline inventories decreased modestly on the week versus an expectation for a modest build. Total gasoline stocks decreased by about 0.4 million barrels on the week versus an expectation for a build of about 1.0 million barrels. The surplus versus last year came in at 1.2 million barrels while the surplus versus the five-year average for the same week narrowed to about 8.9 million barrels.

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Weekly Oil Inventories Report

The API data released yesterday evening showed across the board draws. The API reported a large draw in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 4.6 million barrels, as crude oil imports decreased and refinery run rates also decreased by 2.1%. The API reported basically small draw in gasoline stocks versus projections for a modest build and a larger-than-expected draw in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline with a small draw in distillate fuel inventories this week. The report is somewhat bullish for the entire complex.

It is difficult to differentiate whether the price gains overnight were from the inventory report, or from the falling U.S. dollar and positives out of Europe. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver.

The more widely watched EIA data will be released this morning.  Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today. Finally keep in mind that the large variations from the expectations are likely related to the industry starting to adjust their inventories for LIFO accounting purposes.

Crude Oil Inventories Report

Oil remains mostly coupled to the direction of the U.S. dollar and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background, which does not seem like it will happen anytime soon. As such it is uncertain if many market participants are going to pay much attention to this week’s round of oil inventories data as Europe and the U.S. are still in the midst of uncertainty, suggesting that this week’s oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the tick-by-tick direction of equities and the U.S. dollar (driven by Europe), as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. The normal weekly reports get underway this afternoon when the API data will be released, followed by the more widely watched EIA data on Wednesday morning.

Projections for this week’s inventory reports are summarized in the following table. We can expect:

  • Mixed inventory data with a small increase in refinery utilization rates, which should result in a neutral weekly report
  • A modest draw in crude oil stocks with an increase in refinery utilization rates
  • A modest build in gasoline inventories and only a small draw in distillate fuel stocks as winter weather has still not arrived in most parts of the U.S., especially the large heating oil market along the north east.

If the reported numbers are in sync with projections, the year-over-year deficit of crude oil will narrow to about 8.2 million barrels while the overhang versus the five-year average for the same week will come in around 10.4 million barrels.

Weekly Oil Inventories Reports

The API data yesterday showed across the board builds. The API reported a small build in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 0.5 million barrels as crude oil imports increased and refinery run rates also decreased by 1.4%. The API reported basically no change in gasoline stocks versus projections for a modest build and an expected build in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline and distillate fuel inventories this week. The report is somewhat bearish for the entire complex. The report has resulted in selling in the market overnight. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week, with inventory data a secondary driver. The API reported a build of about 0.5 million barrels of crude oil with a 0.1 million barrel build in Cushing and a build of about 1 million barrels in PADD 2. This is bullish for the Brent/WTI price spread, which has been somewhat range bound since the middle of November. On the week, gasoline stocks were about unchanged while distillate fuel stocks built by about 1.2 million barrels.

The more widely watched EIA data will be released this morning.  Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today.

Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background. At the moment all market participants are continuing to follow the tick by tick direction of equities and the U.S. dollar (driven by Europe), as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price, it is the macro trade that dominates at the moment. As such this week’s oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report.

Natural Gas Commentary

January natural gas futures were lower Monday, Dec. 12, fading to a $3.218/MMBtu session low and trading only as high as $3.271/MMBtu in early trade, the near month contract settled down $0.063 at $3.254/MMBtu as weather forecasts were revised to include milder conditions that could support a steady widening of the five-year-average storage overhang. Technical support for January natural gas is seen at $3.25, $3.00, $2.75 and $2.50 while resistance is marked near $3.50, $3.75, $4.00, $4.25, $4.50 and $4.75/MMBtu.

The market remains depressed by healthy storage and lackluster demand as traders were greeted in the new week by revised weather outlooks showing the eastern U.S. and a portion of the central region will see above-average temperatures through the upcoming 14-day period.

Hand-in-hand with mild weather, demand is seen only ticking higher driving storage levels down modestly and at a rate below both year-ago and five-year average pulls allowing more natural gas to stay in storage, providing little support for price advance.

Early projections for the U.S. Energy Information Administration’s Dec. 15 storage report covering the week ended Dec. 9, suggest a range of pulls from the upper 80s Bcf to the low 90s Bcf, comparing bearishly to a 142-Bcf five-year average pull and a drawdown of 154 Bcf reported for the same week a year ago. The drawdown would follow a similarly bearish 20-Bcf withdrawal in the week to Dec. 2 that left stocks at 3,821 Bcf, widening the overhang to the five-year average to 307 Bcf.

While storage and the delayed start of cold winter weather in key heat consuming regions drives lower the price of natural gas. The market is also watching a steady decline in natural gas directed rig counts and looking to some indication that the fewer number of rigs searching for natural gas will begin to impede production figures. Baker Hughes Inc. reported that for the week ended Dec. 9, natural gas rigs dropped 36, and now stand at 820, 128 rigs lower than last year’s count.

Additionally, on the production side, early winter production freeze-offs were reported mainly in the West over the report period ended Dec. 7, covered in the EIA’s latest “Natural Gas Weekly Update” issued Dec. 8. The EIA reported San Juan basin production fell 400 MMcf on Monday, Dec. 5, with most of the production recovered Dec. 6. “The production shortfalls this week were relatively minor compared to other major freeze-offs that have occurred in the past,” the EIA said.

While production begins to take some hits, consumption rates are rising despite the overall mild weather across the bulk of the country. The EIA reported domestic consumption rose 18.4% for the week covered in its Dec. 8 report. The largest gains came from the residential and commercial sectors, as well as the electric power sector, according to data.

Day-ahead, spot markets prices were also lower post-weekend, extending losses from the Friday session as the market assessed the revised weather outlooks and lower demand requirements on regional power grids and moved the market down accordingly. Deals at the benchmark Henry Hub were done from the upper $3.00s to $3.10s, off a sharp $.16 in deals done for Tuesday, Dec. 13, delivery with additional pressure from futures’ weakness. In the Northeast, Transco Zone 6 NY traded off an even more impressive $.34 in deals that spanned the $3.40s to $3.60/MMBtu as weather drives demand down.

Market Outlook Today

The natural gas market is maintaining its neutral view and bias, but could get more bullish if the near term futures contract closes above the $3.51/MMBtu level. The gas storage surplus that is building is going to get harder to work off until we see cold weather over a major portion of the U.S. In the medium term, many are skeptical about the ability of natural gas prices to muster any kind of strong upside rally absent some very cold weather for an extended period of time.

WTI crude oil is still trading above the key technical support level of the mid- $94’s/bbl and along with the changing fundamentals and geopolitics, the market is keeping its view and bias at cautiously bullish. The economic outcome in Europe this week will certainly influence the outlook for economic growth and the need for oil in the near term. WTI and Brent are once again back to being in sync with the direction of the U.S. dollar and euro, but are also being driven by the ongoing geopolitical situations in the Middle East.

Earlier most risk asset prices were higher, as shown on the chart below.

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Market Outlook Today

The natural gas market is maintaining its neutral view and bias, but could get more bullish if the near term futures contract closes above the $3.51/MMBtu level. The gas storage surplus that is building is going to get harder to work off until we see cold weather over a major portion of the U.S. In the medium term, many are skeptical about the ability of natural gas prices to muster any kind of strong upside rally absent some very cold weather for an extended period of time.

WTI crude oil is still trading above the key technical support level of the mid- $94’s/bbl and along with the changing fundamentals and geopolitics, the market is keeping its view and bias at cautiously bullish. The economic outcome in Europe this week will certainly influence the outlook for economic growth and the need for oil in the near term. WTI and Brent are once again back to being in sync with the direction of the U.S. dollar and euro, but are also being driven by the ongoing geopolitical situations in the Middle East.

Earlier most risk asset prices were higher, as shown on the chart below.

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