Energy fundamentals take a stand

May 20, 2015 09:14 AM

In skating over thin ice, our safety is in our speed.

Ralph Waldo Emerson

After mostly bearish fundamental snapshots over the last several weeks the oil complex finally succumbed to a round of profit taking selling. On Tuesday the entire oil complex was lower with WTI down by 3.6% on the session. For the last week or so the oil markets have been exhibiting the early signs of peaking (at least temporarily) with selling accelerating on Tuesday. From a technical perspective oil has broken through its uptrend channel support levels suggesting further movement to the downside could occur in the short- to medium-term.

So far this morning oil prices are rebounding after a bullish snapshot from the API oil inventory data last night which showed a sizeable draw in both crude oil and gasoline. RBOB gasoline is leading the recovery so far this morning with the rest of the complex following. Most of the oil commodities are now trading in a lower technical trading range after yesterday’s decline, even with the modest recovery rally today (so far).

As discussed many times here, the current fundamentals remain bearish with supply still strongly outstripping demand. The three monthly oil forecasts from the IEA, EIA and OPEC released last week were all bearish as all projected global inventories will increase strongly in Q2 and not tail off to well into Q4. Saudi Arabia and OPEC are continuing to increase production in the face of only small increases in global demand growth.

Further motivating the selling in oil on Tuesday was a strong recovery in the U.S. dollar, which is inversely correlated to oil prices. The U.S. dollar gains were mostly driven by a strong round of selling in the euro which then spread across the currency board. The U.S. dollar is higher overnight while the euro is lower. So far oil has ignored currency signals in overnight trading and is more driven by the inventory data from last night and what may be in today’s EIA inventory report.

For the short term the market is once again starting to pay closer attention to the near-term fundamentals which remain bearish on both a domestic and international level.

Global equites gave back all of last week’s gains in the last twenty four hours. The EMI Global Equity Index declined by 0.4% over the last twenty four hours with the year to date gain narrowing to 11.6%. The ranking among the various bourses in the leader board remain the same with China on top and the Dow Jones Index holding the bottom spot. Global equities have been a negative price directional catalyst for the oil complex so far this week.

The limited API data that was released on Tuesday evening was mostly bullish from a macro viewpoint (since no details were available). The API reported a 5.2 million barrel total crude oil draw, a 1.2 million barrel gasoline draw and a 200,000 barrel Cushing draw. Directionally supportive for oil but the market will have to wait until the more widely followed EIA data is released on Wednesday morning at 10:30 AM EST.

My projections for this week’s inventory report are summarized in the following table. I am expecting a draw in crude oil and builds in both distillate fuel and gasoline with refinery utilization rates increasing on the week.

I am expecting crude oil stocks to decrease by about 2.3 million barrels with total inventories still close to their record high levels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 89.5 million barrels while the overhang vs. the five-year average for the same week will come in around 100 million barrels.

I am expecting crude oil inventories in Cushing, Ok to show another draw this week as the inflow into Cushing decreased more than the outflow from Cushing last week. With storage capacity still available in Cushing storage trades may or may not take place as the economics of storing oil in both the United States and internationally are now unprofitable. Run rates in the PADD 2 region are approaching normal levels as the main part of the spring maintenance season is winding down.

The TransCanada (Keystone) Gulf Coast line increased its pumping rate last week with the line still running below the 500,000 bpd level. Genscape is reporting a flow of 476,129 bpd or an increase of 15,092 bpd compared to the previous week. Last week the combination of the TransCanada Gulf line and both Seaway lines moved about 8.0 million barrels of crude oil out of Cushing or slightly below the same level as the previous week.

This week there was a modest decrease in the net inflow (inflow-outflow) into Cushing primarily driven by a decrease in the inflow with the outflow declining less.  With a modest decrease in the net inflow this could result in another possible draw build in Cushing this week as less oil seems to be heading into Cushing.  The net inflow (inflow-outflow) into Cushing is around the 0.847 million barrels for the week ending May 15 compared to 1.1 million barrels during the previous week.

According to the latest data from Genscape (for more information on Genscape data products visit their website) pipeline outflow from Cushing decreased last week by about 57,775 bpd vs. the previous week. The combined flow rate on the TransCanada Gulf Coast and the Seaway pipelines was marginally lower compared to the previous week. For the week ending May 15, total net outflow from Cushing decreased just 57,775 bpd. The Seaway pipeline increased by 5,447 bpd and averaged 359,229 bpd while Seaway Twin decreased on the week and averaged 310,014 bpd for the week ending May 15. The inflow into Cushing decreased modestly on the week as the Flanagan South Pipeline pumping rate decreased compared to the previous week. The Hawthorn pipeline decreased slightly this week compared to the previous week.

I am expecting a draw in crude oil stocks in PADD 3 as the outflow of crude oil from PADD 2 into the Gulf declined last week. 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 to 84.8% utilization level. Cushing stocks are now running at 85.7% of workable capacity as Cushing inventories after increasing during the previous week. I am now expecting Cushing inventories to decrease again in this week’s report as mentioned above.

With refinery runs expected to increase by 0.6% expect a build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year surplus coming in around 16.1 million barrels while the surplus vs. the five-year average for the same week will come in around 15.3 million barrels.

Distillate inventories are projected to increase by 1 million barrels even as exports of distillate fuel out of the U.S. Gulf were steady but heating demand was likely below normal last week. If the actual EIA data is in sync with my distillate fuel projection inventories vs. last year, it will likely now be about 13.2 million barrels above last year while the deficit vs. the five-year average will come in around 0.4 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 view and bias at neutral as the market seems to be close to entering a downside correction. I am currently looking for a window to go short but I would like to see the market move lower from current levels. The market still remains in a mode of discounting bearish news and embracing anything even remotely bullish and this pattern could derail any downside correction irrespective of the bearish fundamentals.

I am keeping my natural gas view and bias at neutral while the market finishes what looks like a short covering rally. The fundamentals still remain bearish.

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


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