Schork Oil Outlook: What Technicals Say Now
Where is Romeoville, Ill. and why does it matter?
Energy prices were strong last week: Sideways trading was the status quo for much of the week, but twin pipeline disruptions (natty in California and crude in Chicago) led to a pop in prices across the complex. A much better than expected increase in wholesale inventories was icing on the bulls' cake, but we will look for tomorrow’s advanced retail sales and Wednesday’s Industrial production data to indicate whether the summer of doldrums is finally behind us.
Apropos the commentary in Friday’s issue of The Schork Report , regarding the dislocation between the oil markets in New York and London, the differential between the two was cut in half after a leak forced Enbridge to shut down a key pipeline en route to the U.S Midwest (PADD II) from Canada. What’s more, the contango in the front spread on the Nymex narrowed by 40%.
The EPA has given the company until today to stop the leak. Oil futures on the Nymex surged Friday on speculation that inventories from the NYMEX delivery hub (Cushing, Okla.) will be called upon to replace the missing Canadian supplies. Cash prices for Midwest gasoline also spiked for obvious reasons.
As noted on Friday, the template for a sharp build in oil supplies at the Hub was set given the carry the market was paying. That proposition is now in doubt should Canadian supplies remain shut out. The shutdown to the pipeline occurred in Romeoville, IL and had an immediate impact to Citgo’s 170.5 Mbbl/d Lemont refinery (located 5 miles from Romeoville). PADD II is the second largest refinery center in the U.S. and Illinois, 974 Mbbl/d of operating capacity, accounts for the largest share, 26%, of that capacity.
Bottom line, if we had to see a disruption to oil supplies then better now than a month ago. Demand in the Midwest for gasoline (product supplied) dropped on average by 6.3% over the last nine Septembers and per the latest weekly report from the DOE, gasoline supplies are right around the ten-year average. Supplies of ?2 oil are 9% above average and demand has dropped by 0.6% over the last nine Septembers. Finally, crude oil supplies, inclusive of the Nymex hub, were 37% above the ten-year average.
Regardless of the fortunate timing of the leak, the technicals appear to be turning bullish.
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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.