ENERGY PRICES WERE WEAK ON WEDNESDAY … as the bottom fell out from underneath the complex. Markets on both sides of the Atlantic went into freefall after yesterday’s bearishly construed report from the DOE.
As we look ahead to today, the bears have the bulls on the ropes… can they now close the deal?
Yesterday the U.S. government reported that net commercial crude oil stocks rose by 2.9 MMbbls or 0.8% to 365.98 MMbbls. It was the first reported build in a month. As a result, the year-on-year surplus blew out to 59.2 MMbbls (+19%) and the surplus to 2003/2007 increased to 44.7 MMbbls (+14%). Combined with the extant stocking of the SPR, which rose by a de minimis 0.08 MMbbls, total crude oil inventories in the U.S. as of Friday, May 29th increased to 1.088 billion (×109) barrels.
That’s a lot of oil in tank.
On the major products side, ?2 oil continued to build… nothing to say here that we have not said already in past issues of The Schork Report . The market is oversupplied. Forward cover held near a 10-year high, 41.8 days. As far as gasoline goes, stocks inched down by 0.22 MMbbls to 203.2 MMbbls. Over the last month-and-a-half supplies have dropped by 14.1 MMbbls. Out on the periphery, the DOE reported a seasonal build in propane stocks, up 2.0 MMbbls or 5.6%. As a result, supplies jumped over 50 MMbbls and forward cover increased to 59.2 days. Meantime, at the bottom of the barrel, ?6 fuel oil stocks surged for a second straight report, up 1.7 MMbbls or 4.3%. As a result, supplies surged through a seasonal trendline and topped 40 MMbbls for the first time in a year.
The degree to which we see crude oil stocks pullback this summer will not only be a function of refinery utilization, but also the contango. On one hand, the overhang in crude oil stocks, combined with a 4.4% (year-to-date) boost in domestic production will retard imports. On the other hand, we have seen a material contraction over the last four months of the NYMEX über-contango.
In fact, demand for petroleum products in the aggregate fell off of the proverbial cliff. The net amount of products supplied to the market fell below 18 MMbbl/d for the first time since the week following 9/11 and fell to the lowest level, 17.7 MMbbl/d, since May 1999. (see today’s Chart of the Day in The Schork Report ).
So there you go, refiners did not make a lot of product last week because demand is in the toilet. Given that we are bearish on the fundamentals, we still have cause to be cautiously optimistic. Capacity utilization rose 115 bps to 86.3%, which is a year-to-date high. Furthermore, the ratio between crude oil supplies and gasoline increased to 1.8. Over the last four weeks the ratio averaged 1.79. Last year this ratio was 1.51 and the 2003/2007 average is 1.56. Meantime, refinery utilization is still running 3 points below normal.
Given the improvement in economics, we were expecting another strong production number. We did not get it. Instead we received a true-up. But, that’s okay, we also saw a true-up in demand. What’s more, as the NYMEX curve flattens, the incentive to dump oil on the spot market grows. But, with demand at the lowest point in a decade, how low will prices have to fall to offload that oil?
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Stephen Schork is the Editor of, "The Schork Report" and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.