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

Trading Tips from John D. Rockefeller

John D. Rockefeller was America's first billionaire. After the civil war Rockefeller had a good amount of money with which to invest. He (correctly) believed railroads would become the primary means to transport agricultural products and would open up the vast western lands to eastern markets, trends that didn't bode well for his own produce shipping. He began to look for other business ventures that could be profitable and found a fledgling sector poised to take off.....the oil industry.

However, where he and his partners entered was not in oil production, but its refining. The same railroads that would eclipse his shipping business would help launch his refining venture, as Cleveland enjoyed not the usual one rail line, but two. Transportation costs would be lower and thus his refinery products more competitive.

By the late 1860s, only five years after getting into the oil business, Rockefeller's refining company was the largest in the world. A major reason for his success was a business model that today we call vertical integration. Rockefeller knew that in order to keep costs down, he would have to control both the upstream and the downstream. For example, he even bought his own woodlands for lumber to make his own oil barrels, and built kilns on site to dry the lumber and save shipping weight on its way to (his own) cooperage. His attention to cost cutting was painstaking.

So, can we learn from Rockefeller and put the lessons he learned to work for us in our modern day trading?

Let's try.

Trading like Rockefeller.....

1. Lower your costs. Lower costs mean higher margins and much more resilience during bad times. Rockefeller famously reduced from 40 to 39 the number of drops of solder to close the lids of kerosene cans, saving the company hundreds of thousands of dollars in the long run. He'd also ask for financial statements down to three decimal places, the better to spot inefficiencies in his supply chain and fix them.As investors, follow in Rockefeller's footsteps by investing in companies with low costs, but also reduce the cost basis in the stocks you own.

2. Have you checked lately whether you're getting the best deal from your brokerage? Don't be afraid to take your business somewhere else. Every advantage counts in this fast moving world.

3. Also, are you making the most out of your portfolio? Could you do more with it? It's a good idea to invest a portion (and we do mean just a portion) of your portfolio in equities that can offer higher reward for higher risk. This is especially true if your portfolio is heavy in capital.

4. When the market is turning against you, move on. Had Rockefeller stuck to his grain shipping business, he'd likely not even made a ripple on the pages of financial history. When he spotted opportunity in the up and coming oil industry, he wasn't afraid to abandon what had been a good thing and to take the leap.For us, this advice means sometimes selling companies that are under performing. Knowing when it's time to cut our losses and to turn our capital toward more profitable ventures. The tricky part is knowing when to be patient and hold and when to recognize a true shift in the marketplace....and that comes from reading the signs from Mr. Market.

5. Vertical integration is a hallmark among many strong companies. Part of the reason Rockefeller could edge out his competitors was the fact that he controlled his own supply chain. He noticed very early on that if he did not control many aspects of his production, he would be at a disadvantage when it came to negotiations. And as he expanded his business, he purchased companies that could make the entire refinery process smoother, including pipelines, railroads, and even those woodlands we mentioned.Thus, if we want blue chip companies that will perform well for us over the long term, we should look for firms that are vertically integrated within their own sectors.

6. Patience is key. Rockefeller kept his discipline when he landed in a tough job market after school. As investors, we're looking for companies that can pay good dividends in the long run. However, we must be wary of overpaying for stocks. Being patient, letting the market come to us rather than chase it ourselves, will give us the best bang for our buck.

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Crude Oil Market Commentary for Thursday Morning June 28th

CME: August crude oil prices waffled between gains and losses throughout the initial morning hours, amid uncertainty ahead of the EU summit and slowing global growth prospects. The outside market tone provided a modest drag for the crude oil, with global equity markets weaker and slight gains in the US dollar. Additionally, slowing growth concerns have offset concerns that North Sea supplies have come under added strain from an oil worker strike in Norway. August crude oil prices climbed to a new four day high in response to yesterday's EIA data that showed an inventory decline of 133,000 barrels last week. EIA crude stocks are 27.697 million barrels above year ago levels and 41.847 million barrels above the five year average. Crude oil imports for the week stood at 9.118 million barrels per day compared to 9.445 million barrels the previous week. The refinery operating rate was up 0.7% to 92.6%, which compares to 88.1% last year and the five year average of 88.55%.

COT: Crude oil was slightly lower overnight as it consolidates around the 62% retracement level of the 2009-2012 rally crossing at 80.33. Stochastics and the RSI are oversold and are turning neutral to bullish hinting that a short term low might be in or is near. Closes above the 20 day moving average crossing at 82.56 are needed to confirm that a short term low has been posted. 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. First resistance is the 20 day moving average crossing at 82.56. 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.

In other crude oil trading news.....

Venezuela wants OPEC to set an oil price band of $80 to $120 a barrel to stem crude's recent tumble, seeking to revive a policy the cartel scrapped seven years ago.

France is considering a one off tax on the oil sector before the end of 2012 that would raise around 500 million euros ($623.55 million), helping depleted French coffers but hurting its struggling refining industry.

Brazil's state led oil company Petrobras said on Wednesday that May output rose 1.9 percent to an average of 2.60 million barrels a day of oil and natural gas equivalent (boepd) as offshore fields in Brazil restarted after maintenance shutdowns.

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ConocoPhillips Reports First Quarter Earnings

ConocoPhillips [NYSE:COP] today reported first quarter earnings of $2.9 billion, compared with first quarter 2011 earnings of $3.0 billion. Excluding $330 million of special items, first quarter 2012 adjusted earnings were $2.6 billion. Special items were primarily related to gains on asset dispositions, partially offset by impairments and repositioning costs.

“We operated according to plan during the first quarter of 2012, achieving production and refinery utilization targets,” said Jim Mulva, chairman and chief executive officer. “We continued to progress our asset divestment program and execution of our major projects and growth plans. We also accomplished several repositioning milestones, including obtaining a favorable IRS ruling and final board of directors’ approval. Beginning May 1, 2012, our company will become two leading, independent energy companies, ConocoPhillips and Phillips 66.”

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Oil Rises to Seven Week High as Refinery Operating Rates Gain

Oil rose to a seven week high after a U.S. government report showed that refinery operating rates climbed to the highest level since October, bolstering demand. Refinery utilization increased 0.7 percentage point to 81.9 percent in the week ended Feb. 26, the Energy Department said. Analysts surveyed by Bloomberg News forecast that there would be no change. Inventories of crude oil climbed 4.03 million barrels, more than three times what was estimated.

“Refinery run rates increased strongly, which should whittle down the huge oversupply of crude oil,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “This market just wants to go higher, even when there is bearish news.” Crude oil for April delivery increased $1.31, or 1.6 percent, to $80.99 a barrel at 11:40 a.m. on the New York Mercantile Exchange. Futures reached $81.23, the highest level since Jan. 12. Oil traded at $80 a barrel before the release of the inventory report at 10:30 a.m. in Washington.

Total U.S. fuel demand, averaged over the past four weeks, was 19.3 million barrels, up 3 percent from a year earlier, the department said. “We’re seeing a little demand improvement, which gives impetus to higher prices,” said Chip Hodge, who oversees a $9 billion natural resource bond portfolio as senior managing director at MFC Global Investment Management in Boston. “There continues to be optimism that economic growth will accelerate, and with it demand.”

Nationwide stockpiles of crude oil rose 1.2 percent to 341.6 million, the highest level since August, the report showed. It was the biggest gain since the week ended July 24.....Read the entire article.


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Oil Hits Five Week High, Nears $80

Oil prices gained for a fourth straight session, climbing to their highest level in more than five weeks as cold weather swept across the country and the dollar weakened. Crude oil for February delivery rose 72 cents, or nearly 1%, to settle at $78.77 a barrel, the highest since Nov. 18, when prices settled at $79.58 a barrel.

Cooler than normal temperatures have supported rising oil prices, said James Cordier, president of Liberty Trading Group. He added that temperatures in the Northeast have been about five degrees lower than average and are expected to remain that way for the near term.

Prices were also boosted by a softer dollar, which edged lower against its major rivals. Crude oil, like other commodities, is priced in dollars, and a weaker greenback can help support prices.....Read the entire post.

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Crude Oil Falls on Larger Than Expected U.S. Supply Increase

Crude oil fell after a government report showed a larger than forecast gain in stockpiles as sinking demand pushed refinery operating rates to the lowest level in more than a year. Supplies of crude oil rose 1.76 million barrels to 337.7 million last week, the Energy Department report showed. Analysts surveyed by Bloomberg News forecast a 1 million barrel gain. Refinery operations declined to the lowest level since September 2008, when units were shut in the aftermath of hurricanes Gustav and Ike.

“The big problem is that demand is week, and refiners are starting to feel pain,” said Carl Larry, president of Oil Outlooks & Opinions LLC, a Houston based energy adviser. “It’s good for consumers that crude oil stocks increased, but with demand so low, refiners aren’t going to need it to make gasoline and other fuels.” Crude oil for December delivery fell $2.14, or 2.7 percent, to $77.14 a barrel at 11:59 a.m. on the New York Mercantile Exchange. Prices are up 73 percent this year. Futures traded at $77.32 before the report’s release at 11 a.m. in Washington.....Read the entire article.

Gasoline Extends Rally to 10 Days, Longest Since at Least 2005

Gasoline futures rose a 10th straight day, the longest rally in the history of the contract, on refinery shutdowns and a weaker dollar, which increases the investment appeal of commodities. Total SA has shut units at its 240,000 barrel a day refinery in Port Arthur, Texas. The dollar fell as low as $1.4298 per euro, the lowest level since June 3. “It seems as if all of a sudden the gasoline market is leading the way and it looks as if nothing is really stopping the rally,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.....Complete Story


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Saudi Aramco, Total Sign $9.6B Refinery Deals

State run oil giant Saudi Aramco and France's Total S.A. on Tuesday signed $9.6 billion in deals with contractors to build the 400,000 barrel per day Jubail export refinery, one of the oil rich kingdom's top projects. The two companies awarded 13 contracts for the project, the official Saudi Press Agency reported. The Jubail refinery is seen as a key part of Saudi Arabia's plan to boost overall capacity. But the joint venture had suffered.....Complete Story

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Total Beats Estimates and Eni Sells Livorno Refinery

"Total Beats Profit Estimates, Will Maintain Investment Spending in 2009"
Total SA, Europe’s third largest oil company, reported fourth quarter earnings that beat analyst estimates and pledged to maintain investment spending at a similar level to last year to revive production growth....Complete Story

"Api Said to Join Investors in Offering to Buy Eni's Livornro Oil Refinery"
Anonima Petroli Italiana SpA, an Italian gas station company, together with a group of investors, has made an offer to buy an Eni SpA refinery in Livorno, Italy, said Enrico Risaliti, a businessman who is part of the bid....Complete Story

"Unconventional Gas Boosts Outlook for Future Supply"
CERA has augmented its expectations for North American gas supply in the wake of successful unconventional gas production....Complete Story

"Shell Declares Force Majeure on Nigeria Bonny Oil"
Royal Dutch Shell declared force majeure on its Nigerian Bonny oil shipments due to insecurity in the Niger Delta....Complete Story