Schork Oil Outlook: Bears Beware! Here's Why
Energy prices were quiet yesterday (Wednesday).
Natural gas recovered slightly for the first time this week but was trending lower in after-hours trading. For today’s DOE release, the crowd is looking for a 70 Bcf injection. Meanwhile crude oil was strong despite a larger than expected build, and the products fell on the back of another build in ultra-low sulfur diesel stocks. Expect increased volatility as the products approach expiry.
Crude oil production rose to 5.49 MMbbl/d, its highest value all month and 4.2% higher than last year. This is surprising given the pain BP and Valero are reporting on their downstream activities. The bears found some solace in yesterday’s report, as imports were relatively unchanged (a negligible 0.07 MMbbls/d higher) and remain 1.5% below last year. All told, total crude oil stocks now stand at 357.82 MMbbls, 4.5% below last year but 9.9% above the 2004-08 timestep.
On the major products side, gasoline saw a 1.24 MMbbl draw, the opposite of the 0.80 MMbbl build expected by analysts. And yet the gasoline contract sold off while crude, which saw a build, closed higher — go figure. As expected, the West Coast (PADD V) saw a 0.64 MMbbl draw which we expect is a true-up to the previous week’s overly large 1.51 MMbbl build. The bears likely sold off in anticipation of future over-supply: gasoline production saw a large 0.23 MMbbls/d (30.30%) increase. This turns last week’s year-on-year 32.3% production deficit in to a 17.12% y-o-y surplus.
But the bears should keep in mind that the economy is improving strongly and the latest consumer confidence figures rose sharply — increased demand could swallow up extra production. Anyway, total gasoline stocks now stand at 223.69 MMbbls, 5.2% above last year and 9.8% above the 2004-08 timestep.
Total distillate stocks rose by a large 2.9 MMbbls to 151.82 MMbbls. To put that in perspective, it is the highest value ever recorded for April. Further, distillate production rose by 0.1 MMbbls/d and the year-on-year relation switched from a 2.0% deficit in the previous report to a 0.2% surplus as of last week. Total distillate imports rose by 137% - but keep in mind we do not import a large number of distillates on an absolute basis, only 0.25MMbbls/d as of last week. Regardless, a 136% increase in imports and continued strength in production is likely the reason why the heating oil contract sold off yesterday and dragged RBOB with it.
This week’s award for least surprising surprise goes to jet fuel stocks, which rose by a huge 1.62 MMbbls to 44.18MMbbls. That’s the largest weekly build since May 2008, and the largest weekly build for April since 1999. Of course we blame the volcano, but even in the longer scale things look bearish. The cumulative build for 2010 so far stands at 2.2 MMbbls, compared to the 1.06 MMbbls average draw over the same timestep for 2004-08. Thus total stocks now stand 10.0% above last year and 13.0% above the 2004-08 timestep.
There has been much chatter about being bullish the heating oil contract because trucking demand will outpace ultra-low sulfur diesel supplies — but if true, why aren’t we seeing it?
Last week ultra-low sulfur diesel stocks grew by a large 1.37 MMbbls, well outside the 0.52 ±0.34 MMbbl seasonal average and the year-on-year surplus widened from 6.1% to 6.7%. Production grew slightly and remains 5.1% above last year. That would make sense intuitively, it is cheaper to refine diesel than it is mogas, so when refiners are hurting (and their earnings show that they are hurting) they will focus on the cheaper product.
Meanwhile trucking jobs, though recovering in line with the rest of the economy, are well below historical norms. And yet the heating oil crack continues to rocket higher. The temptation to go short is almost too strong — but here at The Schork Report, we always heed Keynes’ warning: “The market can stay irrational longer than you can stay solvent.”
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.