Wednesday, April 16, 2014

Petroleum inventory numbers slightly above expectations

By Dominick Chirichella

The evolving geopolitical situation surrounding the Ukraine is continuing to keep oil prices well bid in spite of a bearish fundamental data point in last night’s API inventory report as well as mediocre data out of China. Although oil is not currently an issue in the Ukraine the escalation of this situation could result in new tighter sanctions against Russia which could in fact impact the flow of oil out of Russia… one of the largest exporters in the world. The market has been slowly building in a risk premium associated with this situation lasting considerably longer and possibly turning into round two of the cold war between Russia and the U.S.

On the other end of the world the latest data hitting the media airwaves out of China was mediocre but better than expected. China’s economy expanded at the weakest pace in the last year and a half as the main economic growth engine of the world seems to be on a path of missing their 2014 objective of 7.5 percent GDP growth target. GDP increased by 7.4 percent in Q1 compared to a year earlier. The headline GDP number was slightly above the market expectations of 7.3 percent growth.

The slowest growth rate in the last year and a half is starting to impact oil consumption in China as most of the indicators are currently suggesting that the number one oil demand growth engine of the world may not hit the growth targets recently forecast by the three main oil forecasting agencies … IEA, EIA and OPEC.

Overall the latest out of China is biased to the bearish side for oil adding to the bearish snapshot from the API data yesterday. The API data (see below for a more detailed discussion) reported a 7.6 million build in crude oil stocks with a 640,000 barrel draw out of Cushing. The more widely followed EIA data will be released at 10:30 AM this morning. There is ample crude oil available in the world with no indications of a shortage anywhere.

In addition the first cargo from Libya (since the deal last week) is ready for loading at the port of Hariga. The ship is scheduled to load today and then exported to Italy. The 1 million barrel cargo may be the beginning of a very slow return of Libyan oil returning to the marketplace.

The WTI (NYMEX:CLK14) contract is certainly getting a boost (especially relative to Brent) due the draw in crude oil stocks in Cushing. Cushing stocks have declined close to 15 million barrels since January but the total level is still about 5 million barrels above the pre-surplus five year average. Cushing is quickly becoming part of the US Gulf region and not simply a standalone location. Oil can now easily flow into and out of the region.

There is no reason for concern over the destocking of crude oil in Cushing as what has been removed from Cushing is simply part of the surplus that has accumulated and is un-needed to meet normal operating requirements of the region. The forward curve remains in a backwardation suggesting inventories should be reduced even further as the industry looks for a stable operating level for the region… which I estimate to be around 21 to 22 million barrels.

The June Brent/WTI spread is narrowing slightly in overnight trading on the API reported draw in Cushing stocks. The spread is currently trading in the middle of its technical trading range of $5/bbl on the support side and about $7/bbl on the resistance end. I continue to expect the spread to return to its pre-surplus normal trading level of WTI trading at a small premium to Brent. However the path to normalization is likely to be choppy during the spring refinery maintenance season in the US.

Global Equities were mostly higher around the world but the EMI Global Equity Index was dragged lower from a strong decline in the Brazilian market. The EMI Index declined by 0.29 percent widening the year to date loss to 2.4 percent. Japan staged a strong rally on a continuation of stimulus and on better than expected GDP data out of China. Japan still remains the worst performing bourse in the Index with Canada continuing to hold the top spot on strong oil prices. Global equities were a mixed price driver for the oil complex over the last twenty four hours.

Wednesday's API report was biased to bearish side as total crude oil stocks increased strongly while refined product inventories were lower. The data is reflective of normal operation of the Houston Ship Channel during the report week. Crude oil imports into the US increased by 182,000 barrels per day with refined product exports from the US likely increasing from the Gulf region. Total inventories of crude oil and refined products combined were higher on the week.

The oil complex is trading higher 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 7.6 million barrels.  On the week gasoline stocks decreased by 0.5 million barrels while distillate fuel stocks decreased by 1.1 million barrels. Refinery utilization rates increased by 0.2 percent.

The API reported Cushing crude oil stocks decreased by 640,000 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 slightly bearish for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting another modest build in crude oil stocks as the spring refinery maintenance season picks up momentum. I am also expecting a small draw in gasoline inventories and in distillate fuel last week with refinery run rates decreasing slightly last week.

I am expecting crude oil stocks to increase by about 1.7 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 1.8 million barrels while the overhang versus the five year average for the same week will come in around 18.5 million barrels.

I am expecting crude oil inventories in Cushing, Ok to be about unchanged to increase slightly even as outflow from the region increased last week. The throttling back of refinery utilization rates in the PADD 2 region is likely to result in a reduction in crude oil demand and thus a backing up of crude oil inventories in both PADD 2 and Cushing which is bullish for the Brent/WTI spread.

The Keystone Gulf Coast line increased its pumping rate strongly after an unscheduled maintenance shut-down during the previous week. The line is once again back above the 300,000 bpd level for the week ending April 11. Genscape is reporting a flow of 354,666 bpd or an increase of 141,247 bpd compared to the previous week. Last week the Keystone line moved about 2.5 million barrels of crude oil out of Cushing or about 1 million barrels more than the previous week. TransCanada said it expected an average of 400,000-500,000 barrels of oil per day to flow through the pipeline in April. With large increase in the outflow pipeline rate around Cushing there will likely be a draw on crude oil stocks in this Cushing area in this week’s round of reports.

According to the latest data from Genscape (for more information on Genscape data products visit their website) the pipeline outflow from Cushing increased strongly as the Keystone Gulf Coast came back from unscheduled maintenance with a bang. For the week ending April 11th total net outflow from Cushing increased by an average of 172,232 bpd (mostly due an increase on Keystone). This was the first week out of the last six weeks that the outflow out of Cushing increased.  Seaway pipeline averaged 312,575 bpd for the week ending April 11th and is back above the 300,000 bpd level. The inflow into Cushing also increased strongly by 152,961 bpd with the largest increase on the Keystone to Cushing line. The Hawthorn pipeline was active last week as rail movements into this area were flowing once again.

I am expecting a modest build of crude oil stocks in PADD 3 (Gulf) of over 1.5 million barrels which will set another new record high inventory level.

With refinery runs expected to decrease by 0.1 percent and with the industry working down its stocks of winter grade gasoline I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.7 million barrels which would result in the gasoline year over year deficit coming in around 7.5 million barrels while the deficit versus the five year average for the same week will come in around 4.4 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 slightly above normal on colder than normal weather 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 3 million barrels below last year while the deficit versus the five year average will come in around 24.1 million barrels.

The above 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. Thus, 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 oil view at neutral and my bias at neutral as the market digest the evolving situation in the Ukraine while awaiting news of Libyan oil possibly flowing once again. I continue to suggest that you remain cautious on Libya until oil is consistently flowing once again.

I am maintaining my Nat Gas view at neutral and my bias at neutral as the market moved back into a higher trading range ahead of the upcoming lower demand shoulder season. The Nat Gas spot Nymex contract remains in the $4.30/mmbtu to $4.70/mmbtu trading range.

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

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