Sharp Contraction in Oil Price Volatility
- WTI has traded in $4.50 range since early December
- Talk that OPEC-non-OPEC agreement may be extended to erase supply glut
- Crude oil exports from U.S. expanding rapidly
- Propane stocks continue to fall
- Natural gas price depressed by low HDDs—537 HDDs below normal for U.S.
Sincerely, Alan Levine, Chairman of Powerhouse
Oil prices are in the midst of a remarkable period of stability. West Texas Intermediate (WTI) crude oil bottomed at $42.20 in mid-November. The subsequent run up to the OPEC-non-OPEC production control agreement brought prices to $50 as December began. Crude oil prices have traded in a narrow range since then, tracing a $4.50 range between $50 and $54.50 for 2.5 months.
This is an unusually long span, especially in light of the spate of oil-related news that has developed in that time. Such news includes a potentially price-raising import tax, possible reinvigorated quota adherence among foreign producers and dramatically expanded production growth prospects in North America.
Stock levels have expanded dramatically in the United States, especially inventories of crude oil and gasoline. Both reached record levels. This is typically bearish. And crude oil production has recovered toward nine million barrels per day with Energy Information Administration (EIA) estimates of further expansion to 9.5 million barrels daily in 2018, adding to the bearish thrust of expectations.
Two nascent bullish factors for prices in the U.S. are surging exports of crude oil and propane. Prior to December 2015, exports of crude oil were extremely restricted. December 2015 saw exports of only 392,000 barrels per day. The EIA report for the week ending February 10, 2017, showed exports over one million barrels daily, blowing away the record for the years since 1990. If and as OPEC-non-OPEC continues to comply with its agreement to reduce output, the ability of the United States to supply overseas users of crude oil would undercut the OPEC group’s control of supply.
This concern has not gone unrecognized in the OPEC sphere. This has become so serious that the group is already talking about extending the deal beyond its current six-month life. If there was full compliance, global stocks would be reduced by about 300 million barrels. This would require demand to remain steady and tightly controlled alternate crude oil supplies. U.S. crude oil supply is resurgent and there have been several exemptions (Libya, Nigeria and Iran) granted among global producers. An extension of the producer-exporter’s deal seems very likely for the second half of 2017.
Supply/demand data in the United States for the week ending February 10, 2017, were released by the EIA.
Total commercial stocks of petroleum increased 11.1 million barrels during the week ending February 10, 2017.
Builds were reported in stocks of gasoline, fuel ethanol, K-jet fuel and other oils. Draws were reported in stocks distillates, residual fuel oil and propane.
Commercial crude oil supplies in the United States grew to 518.1 million barrels, an increase of 9.5 million barrels.
Crude oil supplies increased in four of the five PAD Districts. PADD 1 (East Coast) crude oils grew 0.5 million barrels, PADD 3 (Gulf Coast) crude oil stocks expanded 6.8 million barrels, PADD 4 (Rockies) stocks grew 0.7 million barrels and PADD 5 (West Coast) stocks increased 2.9 million barrels. PADD 2 (Midwest) crude oil stocks decreased 1.3 million barrels.
Cushing, Oklahoma, inventories decreased 0.7 million barrels from the previous report week to 64.6 million barrels.
Domestic crude oil production decreased 1,000 barrels daily to 8.977 million barrels per day.
Crude oil imports averaged 8.491 million barrels per day, a daily decrease of 881,000 barrels. Exports expanded 459,000 barrels daily to 1.026 million barrels per day.
Refineries used 85.4% of capacity, a decrease of 2.3 percentage points from the previous report week.
Crude oil inputs to refineries decreased 435,000 barrels daily; there were 15.458 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 437,000 barrels daily to 15.770 million barrels daily.
Total petroleum product inventories saw an increase of 1.6 million barrels from the previous report week.
Gasoline stocks increased 2.8 million barrels; total stocks are 259.1 million barrels.
Demand for gasoline fell 508,000 barrels per day to 8.433 million barrels daily.
Total product demand decreased 2.151 million barrels daily to 18.663 million barrels per day.
Distillate fuel oil supply fell 0.7 million barrels to 170.1 million barrels. National distillate demand was reported at 3.853 million barrels per day during the report week. This was a weekly decrease of 56,000 barrels daily.
Propane stocks fell 2.6 million barrels to 53.1 million barrels. Current demand is estimated at 1.164 million barrels per day, a decrease of 597,000 barrels daily from the previous report week.
According to the EIA:
Unseasonable mild temperatures during the week contribute to smaller than average net withdrawals. Net withdrawals from storage totaled 114 Bcf, compared with the five-year (2012 – 2016) average net withdrawal of 156 Bcf and last year’s net withdrawals of 136 Bcf during the same week. Warmer temperatures throughout the week for most of the Lower 48 states contributed to decreased heating demand for natural gas and lower withdrawals from storage. Working gas stocks total 2,445 Bcf, which is 87 Bcf more than the five-year average and 303 Bcf less than last year at this time.
Spot natural gas futures topped on December 28, 2016, just shy of $4.00. Since then, prices have pressed lower with only one modest attempt to recover. Meteorological winter is drawing to a close and has offered little support to the market. The Climate Prediction Center’s measure of heating degree days (HDDs) has lagged well behind normal. As of February 11, 2017, the United States generated 537 fewer HDDs than normal (recent cold has brought the comparison even with last year). The colder weather has not shown up in price. Since January 24, natural gas futures have traveled lower in a 20-cent-wide channel. Support can be found at $2.55.
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