Energy prices were weak on Wednesday, the entire complex tanked on the combination of mild weather forecasts and another bearish report from the DOE. As far as today’s EIA report for underground gas storage goes, the crowd is expecting anywhere from a 5 Bcf injection to a 20 Bcf delivery. The five-year average is a 62 Bcf delivery.
Downstream capacity along the Atlantic Coast (PADD I) is fast becoming a ghost town. Total refinery throughput in the U.S. fell by 0.7% last week to 14.08 MMbbl/d. This decline accrued in the wake of Valero’s November 20th announcement to shutter its Delaware City facility. As such, the bulk of the pullback occurred in the East where week-on-week runs plunged by 13.9% to an eight-month low of 1.06 MMbbl/d.
What’s more, imports of crude oil have dropped in accord with recent shut-ins (indefinite and permanent) to East Coast capacity.
To put that into perspective, the current four-week average is one of the lowest rates since 1990 (as far back as the DOE provides weekly data). Imports are now on par to what we saw last April. In fact, outside of last spring, the only other time we have seen imports this low occurred back in the fourth quarter 1990 to first quarter 1991, i.e. in the buildup to oust Saddam from Kuwait.
In response, the NYMEX spot 321 crack spread has rallied by 172 bps (see Chart of the Day in today’s issue of The Schork Report) since Valero’s announcement to close Delaware City. Last night the margin of products to WTI was over 10%. That is still well below range of the seasonal norm of around 13½%, but is marks a significant improvement from the 6.6% margin average we saw for the two weeks preceding Valero’s decision.
This begs the question, are the cracks rallying because of decisions this quarter by Sunoco, Valero, et al. to take capacity offline – the latest being Motiva’s announcement yesterday to mothball a catalytic reformer at its Norco, LA refinery – or are the cracks rallying in spite of?
Either way, at this point we would rather own product over oil.
This wasn’t the case a few months ago; the year-on-year surplus in April was a huge 60%. The decline in propane inventories is a recent event, we’ve seen a 10.3 MMbbl drawdown in the last two months, but what’s causing it?
We haven’t seen a sharp pull back in production – quite the opposite- 3Q and 4Q production were actually 6.9% and 2.0% higher respectively year-on-year. Imports play a more important role, Q4 imports are down 23% y-o-y and 34% over the 2004-07 timestep. This could be due to a much weaker dollar and stronger U.S. refinery output diminishing the need for foreign propane.
Another major factor is the increase in propane supplied, which has followed an opposite path to inventories, as illustrated in today’s issue of The Schork Report. Product supplied was 30% lower year-on-year in summer, but reversed sharply to a 45% y-o-y surplus by October. Since imports are lower, the recovery in domestic demand is coming straight out of stocks at home, and a cold winter could ramp up consumer appetite quickly.
In an illiquid market largely free of speculators, this simple supply and demand relationship has a direct effect on prices. Wholesale propane prices are up 24% since the start of October and, at 122.8 cents per gallon, are now at their highest point since the tail end of the commodity bubble.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.