Energy prices were weak on Wednesday: The liquids dropped to their lowest close all year and natural gas followed suit. A lack of weather, a weak equities market and a resurgent dollar have energy bulls playing defense.
As far as today’s (Thursday) inventory reports go, the Street looked for a build in crude oil of around 2.3 MMbbls and a delivery of natural gas of around 225 Bcf.
As far as this morning’s DOE report goes, the table is set for another draw in the Midwest. To wit, the spot February WTI contract on the Nymex has plunged by more than $5 a barrel or 6.1% since January 7, the day prior to the shut-in of the Enbridge pipeline. Yet, last night the February contract expired at a 12 cent discount (-0.15%) to the March contract. Two weeks ago, the February contract closed at a 53 cent discount (-0.6%) to March.
A significant narrowing of a market contango in the midst of a steep sell-off is counterintuitive. However, ultimately we think this is a bearish event. The Enbridge pipe will continue to run below its max capacity until regulators give the company a thumb’s up. Meanwhile, demand in the Midwest will pickup in the days ahead as Husky ramps up its Lima refinery.
Here at we think that explains the flattening of the Nymex curve… in the near-term, i.e., until the Enbridge pipe returns to a normal flow rate. Meanwhile, further out along the x-axis the curve steepened over the last two weeks, e.g., the contango between the March and the June markets increased from a 1.8% discount on January 7 to a 2.2% discount last night.
- Import-related disruption is expected in the GoM (PADD III) due to inclement weather. High seas and ongoing sporadic fog-related closures to GoM shipping channels continue to hamper the movement of vessel traffic.
- Rolling blackouts along the Venezuelan power grid might also come into play in the week’s ahead. As such, power outages, imposed last week by the Chavez government as part of an electricity rationing program (don’t you just love socialism?), creates a template for potential disruptions to oil production.
The January average for U.S. crude oil inventories in PADD III is currently 162.04 MMbbls, 4.5% below 2009 but 4.1% above the 2004-08 average. The GoM should grow to 165.00 MMbbls for last week, but if imports suffer we could see levels stagnate around 164.80 MMbbls.
Weather along the I95-corridor (Boston to D.C.) moderated last week, but demand was still strong; heating degree days (HDD) were 7-1/2 % above normal in New York City and 10% above in Boston. In this light, the table is set for further erosion of the year-on-year surplus per this morning’s report.
Nevertheless, from our perspective at traders on the Nymex are showing little concern. Last night the spot heating oil crack went off the Board at a paltry 1.09 ratio to WTI. The five-year average (2005-2009) settle is 1.28.
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.