Is there capacity to handle next polar vortex?

February 26, 2014 02:55 AM

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Oil prices are mixed in overnight trading after an uneventful American Petroleum Institute (API) inventory report yesterday afternoon and ahead of this morning’s Energy Information Administration (EIA) oil report. The most interesting change since yesterday was the March heating oil (HO) contract moving back above the key $3.09 technical support level after dropping below it on an intraday basis. This morning the HO contract is once again adding value as another round of cold weather hits the eastern half of the United States.

From a technical perspective all of the commodities in the oil complex hit a top several days ago and have been drifting lower since peaking after a long run to the upside that began in early February. At the moment market participants are looking forward to the upcoming spring refinery maintenance season in both the US and Europe and the implications it will have on overall crude oil supply and demand balances and whether or not the destocking of Cushing inventories will result in a surplus of crude oil in the Gulf Coast.

As of last week’s EIA report crude oil stocks in PADD 3 are above both last year and the five-year average for the same week. In my view the reason why the Gulf Coast surplus is still only slowly building is due to the interruption in crude oil imports over the last several weeks due to fog problems in and around the Houston Ship Channel and the fact that refinery utilization rates are still running above last year at this time as well as above the five year average. The maintenance season is only just getting started.

The April Brent/WTI spread is back to trading with a $7/bbl handle after spending part of yesterday back above the resistance area of $8 to $8.25/bbl. The spread is continuing to slowly work it’s toward more normal historical relationships that existed prior to the huge surplus of crude oil forming in the Cushing area. On a continuation chart basis the spread peaked back on January 9th at around $15.30/bbl and has since narrowed by $8.07/bbl or 52.8%.

The likelihood of another surplus forming in the Cushing area since the start of the Keystone Gulf Coast pipeline is rather low. Also as long as the U.S. Gulf Coast continues to absorb the majority of the crude oil from the Cushing area the spread should continue to narrow. If a surplus of crude oil does form in the Gulf (I think it will at some point) the narrowing trend could be interrupted temporarily until the refinery maintenance season ends prior to the start of the summer driving season. I am expecting the spread to settle into the $5.50 to $8/bbl trading range and possibly hit the $5.50/bbl level over the next several months if crude oil balances in the Gulf remain in check.

The U.S. Department of Transportation has issued an emergency order requiring that all shippers test crude oil to ensure it is properly classified before being transported by rail and prohibiting the use of the “weakest” type of tank car to move crude by rail.

While the agency specifically referenced the Bakken in its press release, the order, which goes into immediate effect, requires that shippers “within the United States” must ensure the product is properly tested and classified in accordance with federal safety regulations. The order also requires that all Class III crude oil shipments be designated “Packing Group I or II,” which is considered hazardous material and requires the use of a more robust tank car. Packing Group III, a lower-risk designation, will not be accepted until further notice, according to the order. This requirement ensures that crude oil will be transported in, at a minimum, a DOT Specification tank car.

The order also imposes civil penalties of up to $175,000 for each violation or for each day a shipper is found to be in violation. In addition, it provides a “right to review” that allows the filing of a petition seeking relief, which must be filed within 20 calendar days of the date of the order.

Global equities declined over the last twenty four hours as the EMI Global Equity Index declined by 0.51 percent with the year to date loss widening to 4.3 percent. The Index is now lower for the week with five bourses in negative territory for the year. Brazil and Japan are still holding the bottom two spots in the Index with Canada still at the top of the leader board with crude oil prices still trading above the $100/bbl mark. Global equities have been a negative price driver for the oil complex as well as the broader commodity complex.

Wednesday's API report was neutral to mildly bearish as total crude oil stocks increased less than expected while refined product inventories declined less than expected. The lower than expected build in crude oil was mostly related to the interruption in ship movements through the Houston Ship Channel due to fog closing down the channel. The API reported a smaller draw in gasoline and in distillate fuel than what was expected. Total inventories of crude oil and refined products were about unchanged on the week.

The oil complex is mixed 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 0.8 million barrels.  On the week gasoline stocks decreased by about 0.3 million barrels while distillate fuel stocks decreased by about 0.7 million barrels. Refinery utilization rates increased by 0.5 percent suggesting the spring maintenance season is not yet underway.

The API reported Cushing crude oil stocks decreased by 1.1 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 bearish for the Brent/WTI spread.

My predictions 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 sixth 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 1.5 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 12.6 million barrels while the overhang versus the five-year average for the same week will come in around 13.3 million barrels.

I am expecting crude oil inventories in Cushing, Ok to show the fifth 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 1 to 1.2 million barrels based on the fact that less oil was moved out of Cushing to the USGC on Keystone last week due to pipeline problems. 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 0.3% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to increase by 1.4 million barrels which would result in the gasoline year over year deficit coming in around 1.6 million barrels while the surplus versus the five year average for the same week will come in around 2.7 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 mostly seasonal 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 11.9 million barrels below last year while the deficit versus the five year average will come in around 32.6 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 mostly in directional sync with the projections. Thus, if the actual data is in line with the projections there will only be small changes in the year over year inventory comparisons for everything in the complex.

I am maintaining my oil view and bias at cautiously bullish but with the caution flag flying. The Nymex HO contract experienced a strong sell-off on Friday and it is now below its range support area even with the prospects for another round of colder temperatures across the eastern half of the US starting this week.

I am maintaining my Nat Gas 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.

Markets were mixed heading into the U.S. trading session as shown in the following table.

About the Author

Energy Market Analysis is published daily by the Energy Management Institute 1324 Lexington Avenue, # 322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.