Friday July 8, 2016
Oil prices fell to their lowest level in nearly two months after the weekly Department of Energy (DOE) inventory report merely met bullish expectations rather than exceeded them. That is to say, the market was clearly expecting bigger draws in oil and products and when those substantially bullish expectations did not come in, the market sold off.
The magnitude and rate of change (negative) during the day was pretty astonishing, with front month WTI falling by three dollars from the early highs. Though WTI is off from its $50 highs of June, the market had been relatively stable of late, with alternative up and down days in the past fortnight. Thursday’s substantial move lower puts WTI at the bottom of the technical trade range ($45). Friday’s price action will either signal a very real bearish reversal (break below $45) or a good buying opportunity following an (overdone) sell-off.
After Wednesday night’s bullish American Petroleum Institute (API) inventory summary, the oil complex was feeling pretty frisky early Thursday, with August WTI trading up almost a dollar. After Tuesday’s post-holiday market decline (with WTI down two dollars), the oil market steadily advanced through Wednesday and early Thursday. August WTI was trading over $48 at the time of the mid-morning DOE release. The results of this week’s data were as follows:
- Crude Oil – draw of 2.2 MMbbls (versus expected draw of 2.3 MMbbls)
- Gasoline – draw of 0.1 MMbbls (versus expected draw of 0.4 MMbbls)
- Distillates – draw of 1.6 MMbbls (versus expected flat)
As noted, the results were fairly consistent with expect predictions: higher crude oil imports were matched by a dip in production and in consistently high refinery runs. Strong gasoline demand was met with significant refinery production of gasoline. Nothing out of the ordinary, and one of the more “normal” reports we have seen. For a more detailed view of this week’s data, please read below.
The market, however, did not view the report as ” as expected,” and violently reacted in bearish fashion. Apparently the across-the-board draws were not big enough (and not as large as the API draws).
August WTI lost a dollar in the first five minutes after the report was released, and that was just beginning of the day’s price action. All oil products systematically moved lower through the day, bottoming out not long before the settle.
Finished products were soft, and the market structure for both RBOB and Heating Oil widened (i.e. more contango, a sign of even greater weakness at the front of the curve). Trading volume was also high, indicating some liquidation of length.
The day’s rout mercifully ended only because of the settle, and August WTI closed at $45.14 (down $2.29). An extremely volatile price
week will end with the June jobs report likely influencing Friday price direction.
- As reported, net inputs of crude oil were essentially flat week-on-week. However, economic run cuts are being announced by at least three East Coast refineries, which will take about 40mbpd of capacity offline due to the deteriorating gas crack refining margin. NOTE: Run cuts such as these in the middle of summer are abnormal, as refineries typically pump out as much gasoline as possible in an effort to satisfy summer driving (gasoline) demand.
- Distillate production lost everything it added the week before as we are back at the same level as we were in mid-June. The output of distillates remains in the upper portion of the historical five-year range.
- Gasoline Production has skyrocketed over the last two weeks, adding 417 thousand barrels per day to the market.
- Bottom line, when looking at the gasoline side of the barrel East Coast refineries (supply side) are faced with inflated stocks, elevated production levels, and import volumes that have progressively grown each year since 2012. And as the monthly statistics from the EIA show, the weekly reported demand figures are somewhat overstated, and it is apparent that the supply side of the equation must adjust.
- Commercial stocks of crude drew in line with market expectations, but only a third of what the API reported the evening before. This draw is within the 'norm' for this time of year and it was sourced amid interesting Supply and Demand alterations.
- The EIA's formula for projecting domestic production of crude oil must have been updated, as year-to-date the trend has been a slow and steady decline. That is until this week, as reported production fell by nearly two-hundred thousand barrels per day. This is likely an adjustment as the previous figures were no longer representative of the landscape. Meaning the reported domestic production fell below 8.5 million barrels a day, territory we haven't experienced since the last week of July in 2014.
- The weekly import figures came to the rescue as 800 thousand more barrels a day pumped across the docks into U.S. tanks, over 97% percent of the increase entered into PADD III hence the build.
- Stocks of distillate fuels continue the abnormal draws of the typical build season, again stemming from the combined changes in the Midwest and Gulf Coast districts while the PADD I sub districts (C - Southeast and B - Mid-Atlantic) continue their tit-for-tat exchange of builds and draws essentially nullifying the other.
- Gasoline inventories, despite the API call for a considerable draw, were flat for the country overall with a large build in the Gulf offset by draws in both PADDs I and II. The PADD I draw is a welcomed change after last weeks' record setting high inventory level. Imports were down from last week's high level and that likely contributed to the extreme disconnect between the numbers.
Published by PAPCO, Inc. (PAPCO)
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