Crude Oil Seasonality, Inventory Rebalancing and Production Cuts

The historical stock build from December 2014 through July 2016, and subsequent decline from August through December has led some to conclude that global stocks had started to rebalance. Instead, the normal seasonality in stocks had been masked by the high overproduction of OPEC, but then normal seasonality kicked in.

Global OECD inventories from past years demonstrate the normal seasonal patterns, with some variability. As shown in this graph, stocks normal build early in the year and peak around August. Stocks normally drop from September through December. But in 2015, the oversupply was so excessive that stock just kept building through the year. They finally peaked in July 2016, then dropped off due to normal seasonal demand. This normal pattern led to a false conclusion that the rebalancing of stocks had begun.

But according to Energy Department data, OECD stocks in March 2017 are 13 million barrels higher than December. And it projects that stocks are likely to peak in May this year, earlier than normal, but to end 2017 with stocks just 14 million lower than a year ago. This is based on the Energy Information Administration ((EIA)) assumption that OPEC does not hold production to its March level. Furthermore, the EIA projects global stocks to set new record highs in 2018, after the OPEC non OPEC cuts presumably end.

Effect of Production Cuts

Some argue that the 285 million barrel excess above the 5 year average as of the end of December should disappear in five to six months by dividing 285 million by 1.8 million barrels per day, the agreed upon size of the daily cut. But that math first assumes that supply was in balance with demand, makes no allowance for rising supplies, such as in the U.S., and it does not take into account the seasonality.

According to OPEC’s figures, global OECD stocks are likely to build both in the first and second quarters, and then decline in the second half of the year, assuming OPEC production remains at the March level.

There was one development last week, if true, did shift the inventory trend lower. The EIA revised its December estimate of OECD stocks down 105 million barrels, a major revision. That reduced the size of the glut to 201 million above its five year average.

Conclusions

The market dropped sharply in early March as a result of the continued rise in stocks. The market has falsely expected to see inventories to soon decline as a result of the production cuts. But seasonal factors need to be taken into account. We should see global stocks decline in the second half of 2017, assuming OPEC extends its cuts. And the decline may start earlier than normal because U.S. refinery utilization is ramping up faster and earlier than usual, thereby requiring more crude oil.

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Best,
Robert Boslego
INO.com Contributor - Energies

Hate Mail, Crumbling Factories, and Sinking Stocks

By Tony Sagami 

The bulls are mad at me. I’ve been heavily beating the bear market drum in this column since the spring. The S&P 500, by the way, peaked on May 21, and this column has been generating a rising stream of hate mail from the bulls as the stock market has dropped. My hate mail falls into two general categories: (1) you are wrong, and/or (2) you are stupid.

Well, I may not be the sharpest tool in the Wall Street shed, but I haven’t been wrong about where the stock market was headed. This column, however, isn’t about me. It’s about protecting and growing your wealth—and that’s why I have been so forceful about the rising dangers the stock market is facing.

Make sure you watch this weeks new video...."500K, Profit and Proof"

One of the themes I’ve repeatedly covered in this column is the rapidly deteriorating health of the two most basic economic building blocks of the American economy: the “makers” (see August 25 column) and the “takers” (see July 14 and August 4 columns).

There are thousands of economic and business statistics you can look at to gauge the health of the US economy, but at the economic roots of any developed country is the prosperity of its factories (makers) and transportation companies (takers) delivering those goods to stores.

This week, let’s look at the latest evidence confirming the piss poor health of American factories.

Factory Fact #1: The Institute for Supply Management released its latest survey results, which showed a drop to 51.1 in August, a decline from 52.7 in July, below the 52.5 Wall Street forecast, and the weakest reading since April 2009.

NOTE: The ISM survey shows that raw-materials prices dropped for 10 months in a row. If you own commodity stocks—such as copper, oil, aluminum, or gold—you should consider how falling raw materials prices will affect the profits of those companies.

Factory Fact #2: Despite all the crowing from Washington DC about the improving economy, US manufacturing output is still worse today than it was before the 2008-2009 Financial Crisis, according to the Federal Reserve.

Factory Fact #3: Business inventories increased at the fastest back to back quarterly rate on record. Inventories increased 0.8% in Q2, following a 0.3% increase in Q1, and now sit at $586 billion. That’s a 5.4% year over year increase!

Remember, there are two reasons why businesses accumulate inventory:

• Business owners are so optimistic about the future that they intentionally accumulate inventory to accommodate an upcoming avalanche of orders.

OR

• Business is so bad that inventory is starting to involuntarily pile up from the lack of sales.

Factory Fact #4: The Manufacturers Alliance for Productivity and Innovation (MAPI), a trade association for US manufacturers, is none too optimistic about the state of American manufacturing.
The reason for the pessimism is simple: US manufacturers are struggling.

• U.S. manufactured exports decreased by 2% to $298 billion in the second quarter, as compared with 2014.

• The US deficit in manufacturing rose by $21 billion, or 15%, compared with the second quarter of 2014.

“The US $48 billion deficit increase in the first half of the year equates to a loss of 300,000 trade related American manufacturing jobs, and the deficit is on track for a loss of 500,000 or more jobs for the calendar year,” said Ernest Preeg of MAPI.

So what does all this mean?

When I connect those dots, it tells me that American manufacturers are struggling. Really struggling.
Take a look at the Dow Jones US Industrials Index, which peaked in February and started to drop well ahead of the August market meltdown.

You know what’s really nuts? The P/E ratio for this struggling sector is almost 19 times earnings and 3.3 times book value!

Is there a way to profit from this slowdown of American factories? You bet there is.

Take a look at the ProShares UltraShort Industrials ETF (SIJ). This ETF is designed to deliver two times the inverse (-2x) of the daily performance of the Dow Jones US Industrials Index. To be fair, I should disclose that my Rational Bear subscribers have owned this ETF since June 16, 2015, and are sitting on close to a 15% gain.

Critics could say that I am “talking up my book,” but I instead see it as “eating my own cooking.” My advice in this column isn’t theoretical—we put real money behind my convictions. That doesn’t mean you should rush out and buy this ETF tomorrow morning. As always, timing is everything, so I suggest you wait for my buy signal.

But make no mistake, American “makers” are doing very poorly, and that’s a reliable warning sign of bigger economic problems.

Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Hate Mail, Crumbling Factories, and Sinking Stocks was originally published at mauldineconomics.com.

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Bears Run For Cover!

From our trading partner Phil Flynn....

Ultra bears are starting to change their tune on oil as weak Chinese manufacturing data and strong manufacturing data in Germany both point to better demand. China's demand may rise as the Chinese government will be forced to act swiftly to reach their growth target and should soon add stimulus increasing oil demand. Factory activity in China fell to 49.2, according to HSBC, a number that should force the Chinese government's hand.

In Germany, we are already seeing the QE impact on oil demand. The Purchasing Managers Index for the manufacturing and services industries across the region rose to a much stronger than expected 54.1 ked by a 0.4 percent expansion in Germany. Germany is the beneficiary of being the strongest economy in the Eurozone at a time when the ECB central bank has launched unprecedented stimulus. On top of that you see the U.K. inflation rate come in at the lowest rate in history. The inflation rate fell below zero for the first time in history and all of a sudden this QE madness is likely to continue.

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Now one might think that might be bearish as the dollar might continue its historic upward move as the rate differential outlook could cause continued safe haven buying. But now it seems that the Fed may be influenced into not rating rates quickly as the dollar strength is causing more problems. We saw in the FOMC that Fed Chair Janet Yellen warned that the Fed will not be impatient in raising rates. The Fed's Stanley Fischer suggested that the Fed will be data, and perhaps dollar dependent on raising rates and warned that there would not be a "smooth upward path" for interest rates hikes.

Oil bears are also counting on another big inventory increase. Yet data from Genscape, the private forecaster, is suggesting that the build might be much less than the 4 million barrel builds that is being bandied about. Genscape reports that the increase of less than 2 million barrels are around 1.6 million. That should reduce fears of storage over flowing. In fact the Energy Information Administration reported that although inventory levels at Cushing are at their record high, storage utilization (inventories as a percent of working storage capacity) are not at record levels. Capacity utilization at Cushing is now 77%, a large increase from a recent low of 27% in October 2014. However, utilization reached 91% in March 2011, soon after EIA began surveying storage capacity twice a year, starting in September 2010."

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The Birth of a New Bull Market

By Jeff Clark, Senior Precious Metals Analyst

If I asked you why you think I’m bullish on platinum and palladium, you’d probably point to the strikes in South Africa, the world’s largest producer of platinum. Or maybe the geopolitical conflicts with Russia, the largest supplier of palladium. Maybe you’d even mention that some technical analysts say the palladium price has “broken out” of its trading range.

These are all valid points—but they’re reasons why a trader might be bullish. When the strikes end, or Russia ends its aggression, or short-term price momentum eases, they’ll sell.
And that will be a mistake.

Because underneath the headlines lies an irreparable situation with the PGM (Platinum Group Metals) market, one that will last at least several years and probably more like a decade. This market is teetering on the edge of a supply crunch, one more perilous than many investors realize. As the issues outlined below play out, prices will be forced higher—which signals that we should diversify into the “other” precious metals now.
The basic problem is that platinum and palladium supply is in a structural deficit. It won’t be resolved when the strikes end or Russia simmers down. Here are six reasons why…...

#1. Producers Won’t Meet the Cost of Production

The central issue of the striking workers in South Africa is wages. In spite of company executives offering to double wages over the next five years, workers remain on the picket line.

Regardless of the final pay package, wages will clearly be higher. And worker pay is one of the biggest costs of production. And the two largest South African producers (Anglo American and Impala), which supply 69% of the world’s platinum, are already operating at a loss.

Once the strike settles, costs will rise further. Throw in ongoing problems with electric power supply, high regulations, and past labor agreements, and there is virtually no chance costs will come down. This dilemma means that platinum prices would need to move higher for production to be maintained anywhere near “normal” levels. Morgan Stanley predicts it will take at least four years for that to occur. And if the price of the metal doesn’t rise? Companies will have no choice but to curtail production, making the supply crunch worse.

#2. Inventories Are Near the Bottom of the Barrel 

 

One reason platinum price moves have been muted during the work stoppage is because there have been adequate stockpiles. But those are getting low. Impala, the world’s second-largest platinum producer, said the company is now supplying customers from its inventories. In March, Switzerland’s platinum imports from strike-hit South Africa plummeted to their lowest level in five and a half years, according to the Swiss customs bureau.

Since producers can’t currently meet demand, some customers are now obtaining metal from other sources, including buying it in the open market. As inventories decline, supply from producing companies will need to make up the shortfall—and they’ll have little ability to do that.

#3. The Strikes Will Make Recovery Difficult and Prolonged

Companies are already strategizing how to deal with the fallout from the worst work stoppage since the end of apartheid in 1994…

• Amplats said it might sell its struggling Rustenburg operations. Even if it finds a buyer, the new operator will inherit the same problems.

• Impala said that even if the strike ends soon, its operations will remain closed until at least the second half of the year.

• Some companies have announced they may shut down individual shafts. This causes a future problem because some of these mines are a couple of miles deep and would require a lot of money to bring back online—which they may balk at doing with costs already so high.

• It’s not being advertised, but a worker settlement will almost certainly result in layoffs since some form of restructuring will be required. This could trigger renewed strikes and set in motion a vicious cycle that further degrades production and makes labor issues insurmountable.

#4. Russian Palladium Is Already in a Supply Crunch

When it comes to palladium, Russia matters more than South Africa, since it provides 42% of global supply. Remember: palladium demand is expected to rise more than platinum, due to new auto emissions control regulations in Asia.

But Russia’s mines are also in trouble…

• Ore grades at Russia’s major mines, including the Norilsk mines, are reported to be in decline.

• New mines will take as long as 10 years to come online. It could take a decade for Russian production to rebound—if Russia even has the resources to do it. This stands in stark contrast to global demand for palladium, which has grown 35.8% since 2004.

• Russia’s aboveground stockpile of palladium appears to have dwindled to near extinction. The precise amount of the country’s reserves is a state secret, but analysts estimate stockpiles were 27-30 million ounces in 1990.

Take a look at reserve sales today:

Many analysts believe that since palladium reserve sales have shrunk, Russia has sold almost all its inventory. As unofficial confirmation, the government announced last week that it is now purchasing palladium from local producers. This paints a sobering picture for the world’s largest supplier of palladium—and is very bullish for the metal’s price.

#5. Demand for Auto Catalysts Cannot Be Met

The greatest use of PGMs is in auto catalysts, which help reduce pollution. Platinum has long been the primary metal used for this purpose and has no widely used substitute—except palladium.

But that market is already upside down.

Palladium is cheaper than platinum, but replacing platinum with palladium requires some retooling and, on a large scale, would worsen the supply deficit. As for platinum (which does work better than palladium in higher-temperature diesel engines), auto parts manufacturers are expected to use more of it than is mined this year, for the third straight year. Some investors may shy away from PGMs because they believe demand will decline if the economy enters a recession. That could happen, but tighter emissions controls and increasing car sales in Asia could negate the effects of declining sales in weakening Western economies.

For example, China is now the world’s top auto-producing country. According to IHS Global, auto sales in China are projected to grow 5% annually over the next three years. PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will double by 2019. That will take a lot of catalytic converters. This trend largely applies to other Asian countries as well. It’s important to think globally when considering demand.

The key, however, is that supply is likely to fall much further than demand.

#6. Investment Demand Has Erupted

Investment demand for platinum rose 9.1% last year. The increase comes largely from the new South African ETF, NewPlat. At the end of April, all platinum ETFs held nearly 89,000 ounces—a huge amount when you consider it was zero as recently as 2007.

Palladium investment fell 84% last year—but demand is up sharply year-to-date due to the launch of two South African palladium ETFs, pushing global palladium holdings to record levels. And like platinum, there was no investment demand for palladium seven years ago.

Growing investment demand adds to the deficit of these metals.

The Birth of a 10 Year Bull Market

 

Add it all up and the message is clear: by any reasonable measure, the supply problems for the PGM market cannot be fixed in the foreseeable future. We have a rare opportunity to invest in metals that are at the beginning of a potential 10-year bull run. Platinum and palladium prices may drop when the strikes end, but if so, that will be a buying opportunity. This market is so tenuous, however, that an announcement of employees returning to work may be too little, too late. We thus wouldn’t wait to start building a position in PGMs.

GFMS, a reputable independent precious metals consultancy, predicts the palladium price will hit $930 by year-end and that platinum will go as high as $1,700. But that will just be the beginning; the forces outlined above could easily push prices to double over the next few years.

At that point, stranded supplies might start coming back online—but not until after major, sustained price increases make it possible.

The RIGHT Way to Invest

In my newsletter, BIG GOLD, we cover the best ways to invest in the metals themselves (funds and bullion), but for the added leverage of investing in a profitable platinum/palladium producer, I have to hand the baton over to Louis James, editor of Casey International Speculator.

You see, most PGM stocks are not worth holding, so you have to be very diligent in making the right picks. Remember, the dire problems of the PGM miners are one reason we’re so bullish on these metals. However, Louis has found one company in a very strong position to benefit from rising prices—and its assets are not located in either South Africa or Russia.

It’s the only platinum mining stock we recommend, and you can get its name, our full analysis, and our specific buy guidance with a risk free trial subscription to Casey International Speculator today.
If you give it a try today, you’ll get three investments for the price of one: Your Casey International Speculator subscription comes with a free subscription to BIG GOLD, where you’ll find two additional ideas on how to invest in the PGMs.

If you’re not 100% satisfied with our newsletters, simply cancel during the 3 month trial period for a full refund—but whatever you do, make sure you don’t miss out on the next 10 year bull market.  

Click here to get started right now.

The article The Birth of a New Bull Market was originally published at Casey Research

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EIA: Gulf Coast Crude Stocks Generally Fall Sharply in December Because of Inventory Taxes

Crude oil inventories in the Gulf Coast often fall sharply in December, averaging a decline of nearly 8 million barrels in that month from 1981 through 2011. Preliminary data for December 2012 show a decline of more than 12.5 million barrels in the region, bringing end of year crude inventories to approximately 165 million barrels.

The reason for this sharp decline: December 31 is the typical assessment date for taxes on crude oil stocks that are collected by many states/counties/municipalities in regions where the bulk of U.S. crude oil and petroleum product inventories are stored. To decrease crude inventories, companies can do a combination of the following: delay or decrease imports, increase runs at refineries, move crude oil out of the taxable region, or sell crude oil to other market participants.



Following December declines, inventories tend to recover in January. Although large crude oil draws can be an indication of demand outpacing supply, the December phenomenon typically does not reflect tightening of the oil market, but rather how companies in the region are taxed on crude stocks. During the middle of the year, crude inventories in the Gulf Coast region both rise and fall, averaging out to relatively small net changes in stocks for a given month.

At the end of December each year, parts of Texas and Louisiana, where significant volumes of crude oil are stored, assess ad valorem taxes (meaning, according to value) on end of year crude oil inventories. These taxes, along with the generally accepted accounting practice of last in, first out (LIFO) method used to value the assets, create an incentive to draw down crude stocks in the region at the end of the year in order to reduce the tax bill.

 

If oil prices have risen during the year, this accounting practice gives companies stronger incentive to reduce inventory because doing so will further limit their tax exposure. Conversely, if oil prices have fallen throughout the year, companies have less incentive to reduce crude held in storage.

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Crude Oil Traders Whisper....U.S. Inventories on the Rise

CME: August crude oil prices trended lower throughout the overnight and initial morning hours. Traders noted that some of the late day advance yesterday was tempered by private industry data that suggesting that U.S. crude stocks might have unexpectedly increased last week. The market also appears to be under a degree of pressure in front of this week's EU summit, which is largely expected to show little progress in resolving the European debt crisis. The crude oil market garnered support in yesterday's session from mounting concerns over a tightening North Sea supply situation.

COT: August crude oil was slightly lower overnight as it consolidates below the 62% retracement level of the 2009-2012 rally crossing at 80.33. Stochastics and the RSI are oversold but remain neutral to bearish signaling that additional weakness is possible near term. If August extends this year's decline, the 75% retracement level of the 2009-2011 rally crossing at 73.28 is the next downside target. Closes above the 20 day moving average crossing at 82.86 are needed to confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 82.86. Second resistance is the reaction high crossing at 87.32. First support is last Friday's low crossing at 77.56. Second support is the 75% retracement level of the 2009-2011 rally crossing at 73.28.

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Working Crude Oil Storage Capacity at Cushing, Oklahoma Rises

As of March 31, 2012 working crude oil storage capacity at the Cushing, Oklahoma storage and trading hub was 61.9 million barrels, an increase of 6.9 million barrels (13%) from September 30, 2011 and 13.9 million barrels (29%) from a year earlier, as reported in EIA's recently released report on Working and Net Available Shell Storage Capacity.

Utilization of working storage capacity on March 31, 2012 was 64%, an increase from the 53% observed in September 2011, but lower than the 86% observed on March 31, 2011. The report also noted that operating shell storage capacity increased 8.1 million barrels (12%) from September 30, 2011 to reach 74.6 million barrels.

Both storage capacity and the level of inventories held at Cushing are closely watched market indicators, as Cushing is the market hub for West Texas Intermediate (WTI) crude oil that is the basis for crude oil futures contracts traded on the New York Mercantile Exchange. High inventory levels at Cushing have been a symptom of transportation constraints that have resulted in WTI trading at a discount relative to comparable grades of crude oil since early 2011.

Growing volumes of U.S. crude oil production, along with a higher level of imports from Canada, have helped contributed to the record levels of inventories at Cushing. Increased flows of crude oil from these two sources, along with expectations for future increases, have consequently created the need for additional storage at the hub.

Weekly data show that as of June 1, 2012, crude oil inventories held at Cushing were 47.8 million barrels, the highest level on record and very close to total working storage capacity as of March 2011. However, due to the growth in storage capacity between March 2011 and March 2012, the utilization rate for working storage capacity at Cushing has actually declined over the past 14 months.

Crude Oil May Fall as Seaway May Prove Insufficient to Ease Glut

Here is the simple truth about trends

Crude oil may decline next week on concern that the reversal of the Seaway Pipeline will not be enough to alleviate a record supply glut in the central U.S., a Bloomberg survey showed.

Nineteen of 34 analysts, or 56 percent, forecast oil will drop through May 25. Nine respondents, or 26 percent, predicted prices will rise and six estimated they will be little changed. Last week, 48 percent of surveyed analysts expected a decrease.

Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) completed the pipeline reversal yesterday and plan to start shipping oil this weekend from Cushing, Oklahoma, the delivery point for West Texas Intermediate oil futures traded in New York, to the Gulf Coast. U.S. oil inventories rose to a 22 year high and Cushing stockpiles peaked in the week ended May 11 as domestic output increased, according to the Energy Department.....Read the entire Bloomberg article.


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EIA: Spot Crude Prices Near 12 Month High, Natural Gas and Power Prices Near 12 Month Low

Key wholesale energy price benchmarks for crude oil, natural gas, and electric power reflect contrasting trends over the past year. International events have contributed to higher wholesale crude oil prices, whereas high levels of domestic natural gas production coupled with mild weather and record storage inventories have lowered wholesale natural gas prices. Because natural gas remains the marginal fuel in most electric power markets and because low heating and cooling demand in recent weeks have reduced electricity demand, electric power prices remain low as well. The figures above compare recent weekly price ranges (for March 29, 2012 - April 4, 2012) to the range of wholesale prices during the past year.

Cushing Crude Oil Inventories Rising in 2012

Crude oil inventories at the Cushing, Oklahoma storage hub, the delivery point for the NYMEX light sweet crude oil futures contract, are up by 12.0 million barrels (43%) between January 13, 2012 and March 30, 2012. This was the largest increase in inventories over an 11 week period since 2009. The inventory builds can be partly attributed to the emptying of the Seaway Pipeline, which ran from the Houston area to Cushing, in advance of its reversal. While Cushing inventories are now approaching the record levels of 2011, the amount of available storage capacity at Cushing is much greater now than it was a year ago, relieving some of the pressure on demand for incremental storage capacity.



 Historically, the Seaway Pipeline delivered crude oil from the U.S. Gulf Coast to Cushing, where it then moved to the refineries connected by pipeline to the storage hub. In November 2011, Enbridge Inc. acquired a 50% share in the pipeline from ConocoPhillips; at this time, Enbridge and joint owner Enterprise Product Partners announced they would reverse the direction of the pipeline to flow from Cushing to the Gulf Coast. Currently, the pipeline is expected to deliver 150,000 barrels per day (bbl/d) from Cushing to the Gulf Coast beginning in June 2012. The companies plan to expand Seaway's capacity to 400,000 bbl/d in 2013 and to 850,000 bbl/d in 2014.

In early March, approximately 2.2 million barrels from the Seaway pipeline was emptied into Cushing storage in order to prepare for the pipeline's reversal. This accounts for about 20% of the build in inventories during this period. However, even without the emptying of Seaway, inventory builds over the past months have been particularly steep compared to the five year average. As of January 13, Cushing inventories stood at 28.3 million barrels, slightly below their seasonal five year average. After the 12.0 million barrel increase, inventories were almost 11 million barrels above their average level, the largest such variation to average since June 2011. This is largely due to flows into Cushing as a result of increasing production in the mid-continent region.


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EIA: U.S. Refineries and Blenders Produced Record Amounts of Distillate Fuels

Source: U.S. Energy Information Administration, Weekly Petroleum Status Report.
Download CSV Data

U.S. refiners produced historically high volumes of distillate fuels (a category that includes both diesel fuel and heating oil) and motor gasoline in 2011. By fine-tuning their production mix, refineries consistently set record levels of distillate production, most recently topping 5 million barrels per day (bbl/d) for the weeks ending December 2 and December 16, 2011.

In 2011, weekly distillate production was above the five-year historical range 25 times, and ranked second highest an additional 19 times. Finished motor gasoline production was robust over the same period, but was slightly more in line with production volumes at comparable times of year since 2006.

Because of its chemical composition, crude oil run through a refinery typically yields roughly twice as much motor gasoline as distillate fuels. Therefore, regardless of economic or other incentives, refiners cannot completely stop making some finished petroleum products in favor of others. However, by adjusting downstream processes and the types of crude oil used, refineries can optimize production to fine-tune the balance of their finished products output. For much of 2011, refiners saw favorable margins and robust global demand for distillate fuels. In order to benefit from these trends, refineries:

• Increased crude runs to maximize overall output. This explains why both motor gasoline and distillate fuels production levels are high relative to the five-year historical ranges.
• Shifted production mix. This explains why the distillate fuels production levels exceeded historical ranges in more weeks than motor gasoline production did.
• 
  

Since early October, the spot price for ultra-low-sulfur distillate fuel oil rose, while the spot price for motor gasoline (as measured by New York RBOB spot prices in the chart below) declined, widening the spread between these two petroleum product prices. On November 14, 2011, the spot price for ultra-low-sulfur distillate was nearly 65 cents per gallon higher than the spot price for RBOB. The spread between these product prices had not been more than 60 cents per gallon since November 2008.

Source: U.S. Energy Information Administration, based on Bloomberg.

Note: Ultra low sulfur distillate spot prices shown as New York ultra low sulfur distillate spot prices; motor gasoline prices reflect New York RBOB spot prices.

Along with high domestic prices, strong international markets for distillate fuel oils have spurred increased production. In the United States, refineries have typically optimized production for finished motor gasoline to meet high U.S. demand. European refineries, on the other hand, tend to produce higher percentages of distillate fuel oils, as diesel is used more broadly there for transportation.

 Due to crude supply disruptions to European refineries for much of this year, the region has imported more finished products. Weekly U.S. gross distillate export estimates (bound primarily for European and South American markets) were at record levels in the fourth quarter of 2011, topping more than 0.9 million bbl/d in October and November, and exceeding 1 million bbl/d in December.

Robust global distillate demand has led to a significant inventory draw, despite heightened U.S. production. From the end of September to the end of December, U.S. distillate inventories fell by more than 13 million barrels.

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Spot Natural Gas Prices Dipped to Two Year Low in November

Spot natural gas prices at the Henry Hub in Erath, Louisiana fell to $2.83 per million British thermal units for delivery on November 24, 2011, the lowest price since November 17, 2009. Henry Hub is the benchmark location for key natural gas financial instruments on the New York Mercantile Exchange and the IntercontinentalExchange such as futures contracts, swaps, and options.
Key factors affecting natural gas prices include:

• Growing domestic production. U.S. domestic marketed production averaged 65.4 Bcf/d through September, based on EIA data, an increase of about 7% from the same period in 2010, while demand for the corresponding period was up 2% this year.
• High natural gas storage levels. For the week ending November 25, 2011, natural gas storage inventories were 3,851 billion cubic feet (Bcf), down one Bcf from record inventory levels set the prior week but over 7% above the five-year average.
• Seasonal weather. Warmer-than-average weather across most of the United States has delayed the start of winter weather and the corresponding increased natural gas demand for heating. Through November 28, cumulative U.S. population-weighted heating degree-days in the 2011-2012 winter season are 8% below the 30-year average and are down 16% in the natural gas heating-intensive Northeast region.

Spot prices at Henry Hub rose about $0.70 per million British thermal units after the Thanksgiving Holiday weekend due to cooler temperatures and higher demand.

Source: U.S. Energy Information Administration, based on Bloomberg.
Note: Data included through November 30, 2011.

  

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Musings: Upcoming Winter Could Be A Repeat Of Last Year's Winter

Recently, ImpactWeather, a Houston based weather forecasting and consulting firm, held a webinar in which they discussed their view of the weather trends that will impact temperatures and precipitation in the United States during both the next 30 days and the winter period of December through February. The bottom line is that the developing La Niña in the South Pacific Ocean is controlling the weather patterns. So far the pattern has allowed an active hurricane season to develop but has contributed to only a few of the storms entering the Gulf of Mexico and making landfall on the U.S. coast.

ImpactWeather showed a chart that contained the various global sea surface temperature (SST) anomalies that are influencing global weather patterns. ENSO (El Niño/La Niña Southern Oscillation) is probably the most prominent SST anomaly, but the Pacific Decadal Oscillation (PDO) Pattern, the Atlantic Multi-decadal Oscillation (AMO) Pattern and the Indian Ocean Dipole (IOD) Pattern are also strong weather influencing factors. As shown in the accompanying chart (Exhibit 3), ENSO and PDO are in their cold phase while the AMO and IOD are in their warm phase.

Exhibit 4. La Niña Dominates Winter Weather
 
Source: ImpactWeather

The impact of the PDO and La Niña phases is best shown by the forecasts showing the deviation in temperatures that can be expected in the future as a result of these patterns. As shown in Exhibit 5, the 2011-2012 winter forecast shows that temperatures should average between 1°C and 1.4°C below normal. The forecast for November called for a 1.4°C lower temperature range, which would seem to be consistent with the cooling that has been experienced since late October. The chart shows a multitude of temperature forecasts generated by computer models, virtually all of them showing negative deviations. If one compares the forecasted temperatures for this winter with the temperatures experienced last winter (the far left side of the chart), they look similar, but the forecasted temperature anomalies don't show the move back to zero as experienced last summer. That would suggest that in the United States we may not experience the extreme heat witnessed last summer. That doesn't mean that the drought conditions will end, but lower temperatures would be a welcome relief......Read the entire Musings From The Oil Patch Article.


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So Much For One Hundred Dollars Per Barrel

Much was made of WTI crude oil passing the $100.00 mark and many thought that if we closed above $100 a barrel we would be in some type of new era for oil. Well that era is now over and lasted only a day as European debt fears, as well as the realization that the reversal of the seaway pipeline ultimately is more bearish then bullish. A terrible Italian and now Spanish debt auction stirred fears that the Euro zone credit woes are expanding.

Lack of confidence in the EU is causing buyers of Eurozone debt to command post EU record highs. Fear of a EU meltdown is overshadowing the fact that in the US our economy is starting to recover. More evidence yesterday came with a strong jobless claims number, retail sales, housing starts as well as other data that seems to suggest we are starting to move. The dollar and bond rallied in a safe haven bid and commodities started to tumble.

Get ready to party! Natural Gas supply hit a record high! The Energy Information Agency reported working gas in storage was 3,850 Bcf as of Friday, November 11, 2011. This represents a net increase of 19 bcf from the previous week. Stocks were 14 bcf higher than last year at this time and 224 bcf above the 5 year average of 3,626 bcf. In the East region, stocks were 58 bcf above the 5 year average following net injections of 9 bcf.

Stocks in the producing region were 148 bcf above the 5 year average of 1,098 bcf after a net injection of 11 bcf. Stocks in the West region were 18 bcf above the 5 year average after a net drawdown of 1 bcf. At 3,850 bcf, total working gas is above the 5 year historical range. Now the question is whether or not we will end the winter at a record.

Reuters News reports, "U.S. natural gas inventories should end winter at a 21 year peak after starting the heating season at an all time high for a third straight year, creating a buffer for consumers over the summer, according to a Reuters poll of traders and analysts. Without winter temperatures that come close to matching last year's severe cold, brimming inventories next spring could spell more trouble for prices, which hit a two year low this week of $3.11 per mm Btu despite the fast approaching peak heating demand season.

The Reuters storage poll put the consensus forecast for end winter inventories at 1.864 trillion cubic feet, nearly 300 billion cubic feet, or 19 percent, above average and the highest since 1991 when stocks in late March stood at 1.912 tcf. Such high inventories at the start of the spring and summer stock building season give utilities more bargaining power when rebuilding supplies for next winter, and can help lower power costs for consumers during summer when prices can go up as air conditioners come on."

Phil Flynn

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Where is Crude Oil Headed on Thursday?

With all of the news coming out of Egypt and Brent Oil finding a new home above $100 you would think it was no where but up for WTI Crude. But Americans are finding little interest in the news out of the middle east as they are more concerned about weather or not the interstate system in the U.S. staying open then the Suez Canal staying open at this point. Most of the U.S. is being rocked by a severe winter storm and oil inventories continue to rise. Crude oil has moved higher this morning, topping $92 dollars as we go to print. But a quick slash of the magic crayon is still telling us that crude may have put in a double top in the first two weeks of the year and will have to top the January high of 93.46 to force us on the bull bus.

Winter storms or news out of Egypt, we'll still use the same numbers. Here's your pivot, support and resistance numbers for Thursday morning.....

Crude oil was higher overnight and poised to renew the rally off last Friday's low. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near term. If March extends the rally off last Friday's low, January's high crossing at 93.46 is the next upside target. Closes below the 10 day moving average crossing at 89.12 would temper the near term friendly outlook. First resistance is Monday's high crossing at 92.84. Second resistance is January's high crossing at 93.46. First support is the 20 day moving average crossing at 90.23. Second support is the 10 day moving average crossing at 89.12. Crude oil pivot point for Thursday morning is 90.91.

Natural gas was lower overnight as it consolidates below key resistance marked by the 20 day moving average crossing at 4.470. However, stochastics and the RSI are oversold and are turning bullish hinting that a short term low might be in or is near. Closes above the 20 day moving average crossing at 4.470 are needed to confirm that a short term low has been posted. If March renews the decline off January's high, the 62% retracement level of the October-January rally crossing at 4.225 is the next downside target. First resistance is the 20 day moving average crossing at 4.470. Second resistance is the reaction high crossing at 4.601. First support is last Friday's low crossing at 4.252. Second support is the 62% retracement level of the October-January rally crossing at 4.225. Natural gas pivot point for Thursday morning is 4.404.

Gold was slightly higher overnight but continues to consolidate above the 25% retracement level of the 2009-2010 rally crossing at 1296.40. Stochastics and the RSI are neutral to bullish hinting that a low might be in or is near. Closes above the 20 day moving average crossing at 1354.60 are needed to confirm that a short term low has been posted. If February renews the decline off January's high, the 25% retracement level of the 2009-2010 rally crossing at 1296.40 is the next downside target. First resistance is the reaction high crossing at 1349.00. Second resistance is the 20 day moving average crossing at 1354.60. First support is last Friday's low crossing at 1309.10. Second support is the 25% retracement level of the 2009-2010 rally crossing at 1296.40. Gold pivot point for Thursday morning is 1335.00.


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Bloomberg: Crude Oil Has Biggest Weekly Decline in Three Months on China Bank Reserves Move

Crude Oil fell, posting its biggest weekly loss in three months, after China ordered banks to raise reserves in a move that may slow growth in the world’s largest energy consuming country. Futures dropped 0.4 percent after China told lenders for the fifth time this year to set aside more funds to drain cash from the financial system and limit asset bubbles. Economic growth will spur a 9.5 percent jump in 2010 Chinese oil use, according to a Nov. 12 International Energy Agency report.

“These further moves by the Chinese to rein in their economy and the real concern they’re expressing about inflation is weighing on this crude market,” said John Kilduff, a partner at Again Capital LLC, a New York based hedge fund focusing on energy. Crude for December delivery fell 34 cents to settle at $81.51 a barrel on the New York Mercantile Exchange. Prices have dropped 4 percent since Nov. 12, the most since the week ended Aug. 13. The December contract expired today. The more active January contract slipped 44 cents, or 0.5 percent, to $81.98.

The People’s Bank of China said it will raise the reserve ratio requirement for the nation’s banks by 50 basis points starting Nov. 29. Speculation of an imminent increase in interest rates to counter inflation helped to drive the biggest selloff in China’s benchmark stock index since May over the past two weeks......Read the entire Bloomberg article.


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Phil Flynn: Shake It Off!

Can the global commodity markets shake off the threats of Chinese rate hikes? Well today they are going to try. Still yesterday the oil markets ignored a very bullish oil inventory report after Chinese Premier Wen Jiabao said that he and the state council were drafting measure to address inflation. This led to the belief that interest rates in China may go up dramatically and curtail that oh so precious Chinese oil demand... Not Even a massive drop in US oil supply was enough to deter the market from going lower.

The EIA reported that U.S. commercial crude oil inventories decreased by a whopping 7.3 million barrels from the previous week. At 357.6 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 2.7 million barrels last week and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories decreased last week.

Distillate fuel inventories decreased by 1.1 million barrels and are above the upper boundary of the average range for this time of year. Oil Exports and Low imports and refinery maintenance are the reason for the draws. The strikes in France are still taking a toll on our supply. Bloomberg News China International United Petroleum & Chemical Co., the nation’s largest oil trader, plans to boost diesel imports for a second month in December to ease a domestic shortage of the transport fuel.

China International, or Unipec, plans to import 120,000 tons for December delivery, compared with......Read the entire article.


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Commodity Corner: Crude Oil Price, Natural Gas Inventories Hit New Highs

Crude oil for December delivery surged to $88.21 a barrel Wednesday before settling at $87.81. The day's peak oil futures price, a two year high, followed a U.S. Department of Energy report showing that commercial crude inventories fell by 0.9 percent last week. According to the department's Energy Information Administration, oil stocks had declined to 364.9 million barrels as of last Friday 3.3 million barrels lower than the previous week's figure. The most recent number represents the first decline in crude stocks that EIA has reported in the past four weeks. December crude oil bottomed out at $86.10.

Natural gas futures, meanwhile, fell 3.8 percent after the EIA reported that U.S. natural gas inventories rose to record territory last week. December natural gas settled at $4.05 per thousand cubic feet, a 16 cent drop from Tuesday, after trading within a range from $4.06 to $4.25. According to EIA, the amount of natural gas in storage hit 3,840 billion cubic feet (Bcf) as of November 5. The 19 Bcf net injection week-on-week propelled the inventory statistic to a new all time record. In addition, the figure is approximately 10 percent higher than the five year (2005-2009) average. The December gasoline futures price ended the day at $2.24 a gallon, slightly more than a nickel higher than Tuesday's settlement. Gasoline traded from $2.18 to $2.25.

Courtesy of Rigzone.Com

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Goldman Sachs: Oil Will Be "Substantially Higher" by 2012

Crude oil prices will be “substantially higher” by 2012 as the global stockpile surplus shrinks and excess production capacity drops, according to Goldman Sachs Group Inc., the most profitable bank in Wall Street history. Global economic growth will drive oil demand and reduce inventories, which are still “exceptionally high” in developed countries including the U.S., the world’s biggest user of crude, Goldman said in a report dated yesterday. Spare capacity held by the Organization of Petroleum Exporting Countries will decline as the 12-member group, which pumps 40 percent of the world’s oil, boosts supply to meet demand, the bank said.

“Despite the recent rally, we believe that forward price levels offer good hedging opportunities,” Goldman analysts, led by Allison Nathan in New York, said in the report. “We continue to expect improving fundamentals will provide additional support to prices.” Oil climbed to the highest in two years yesterday, and is up 7 percent this month, on speculation the Federal Reserve’s stimulus program will weaken the dollar, bolstering the investment appeal of commodities. U.S. crude inventories plunged 7.4 million barrels last week, the biggest drop since September 2008, according to an American Petroleum Institute report yesterday.

The Fed said Nov. 3 it will buy an additional $600 billion of Treasuries through June to spur the economy. Investors should have an “overweight allocation” on commodities because this policy, along with the global recovery, is positive for prices, according to Goldman.......Read the entire article.


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Commodity Corner: Crude Oil Gets Boost from Manufacturing Figures

December crude oil settled 1.9% higher Monday on positive manufacturing news from China and the U.S. Front month oil rose $1.52 to end the day at $82.95 after the China Federation of Logistics and Purchasing (CFLP) announced the country's Purchasing Managers Index (PMI) for October was 54.7 percent. The latest figure is 0.9 percentage point higher than September's PMI. The indicator gauges China's manufacturing sector, and a figure above 50 percent signifies economic growth.

In the U.S., the Institute for Supply Management (ISM) reported that its own manufacturing indicator for October also called the "PMI" increased from 54.4 percent in September to 56.9 percent in October. ISM attributed the 2 1/2 percentage point gain to growth in new orders, production, and employment. Despite these improvements, however, ISM reported that supplier deliveries are slowing down and inventories are growing. Also, the 56.9 percent figure for October is still nearly 6 percent lower than the high for the past 12 months: 60.4 percent in April.

December crude oil traded within a range from $81.32 to $83.86 Monday. Natural gas futures, meanwhile, ended the day lower for the first time since last Wednesday. December natural gas fell 21 cents to settle at $3.83 per thousand cubic feet given abundant inventories and underwhelming demand. Also, warmer temperatures are expected to return to the Central and Eastern U.S. next week and thus further stave off increased demand for heating fuels.

The front month natural gas price fluctuated from $3.825 to $4.19 Monday. The December contract price for a gallon of gasoline rose three cents Monday to settle at $2.09 after trading from $2.06 to $2.13. The expired November contract ended the day Friday at $2.10.

Courtesy of Rigzone.Com


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