Thursday May 26, 2016
Buoyed by momentum trading and by a larger-than-expected crude oil stock draw in the weekly Department of Energy (DOE) inventory summary, July WTI broke out of its recent range-bound activity to post another recent high and settle on the precipice of $50. The front month WTI contract has been in minor slumber mode of late, settling in a dollar range for the past week-and-a-half, though price risk has always seemed to be more to the upside than the downside. The break out of that range augers well for another bullish move, though there will certainly be some selling pressure at or near the $50 price level. Trading volume should be quite voluminous on Thursday, as the market will look to square books and perhaps move risk before the start of the long U.S. holiday weekend.
July WTI traded in the black all day on Wednesday, opening the day around $49 in anticipation of the DOE report. As noted above, the market seemed to be ready for a breakout, though the early price action again indicated the underlying view that prices should move higher. The results of this week’s DOE report were as follows:
- Crude Oil – draw of 4.2 MMbbls (versus expected draw of 2.5 MMbbls);
- Gasoline – build of 2.0 MMbbls (versus expected draw of 1.1 MMbbls);
- Distillate – draw of 1.3 MMbbls (versus expected draw of 1.1 MMbbls).
Crude oil stocks should be seasonally drawing this time of the year, as spring maintenance season has, by-and-large, been completed. This increased crude oil appetite, coupled with a known significant dip in Canadian oil imports, could portent significant crude oil draws in the near future. The gasoline build was driven by a dip in demand, week-on-week, though that decline was off of incredibly strong numbers (especially for May). For a more detailed view of the DOE data, please read below.
The first fifteen minutes after the report’s release were as volatile as we have seen in a while, and the front month WTI contract traded in a dollar range very quickly (mind you, WTI has been in a dollar range for ten days, so seeing it hit the same highs and lows in such a short amount of time was shocking). After this initial fanfare, WTI resumed its gradual march higher (in tandem with surging equity markets). Though July WTI ultimately did not cross $50 on Wednesday, it did settle at its highest point of the day (another prediction of positive price action on Thursday). July WTI settled on Wednesday at $49.65 (up $1.03 on the day).
The gasoline stock draw did hamper NYMEX RBOB, as that contract severely lagged the rest of the complex during the day. Though NYMEX RBOB has trailed NYMEX HO this month, that has not been the case on the cash side for these products. Midwest and Gulf Coast gasoline markets have been very strong for the past few weeks, indicating product tightness in those regions (and this heading into the holiday weekend). June RBOB was down a penny on the day, while June HO was up over two cents. Both of these contracts expire next Tuesday.
- Net inputs of crude oil declined slightly for the week largely on the back of PADD III declines.
- The gulf coast played host to a myriad of refinery issues last week including Valero’s Port Arthur refinery, Marathon’s Galveston Bay refinery, and both Phillips 66 Lake Charles and Borger refineries.
- Production of distillate fuels fell off some, but is largely remaining tied to the historical five-year average.
- Gasoline production – like its distillate brethren – decreased for the reported week.
- PADD II sourced most of the decline in gasoline production as the gas making units at select key refineries have begun experiencing issues including BP’s Whiting, BP-Husky’s JV in Toledo, and Marathon’s Detroit refinery.
- Stocks of crude oil took a tumble last week and nearly the total draw came from PADD III, a likely culprit is the over half a million barrel per day decline in imports.
- Total stocks on the distillate side has continued the gradual draw which is characteristic of this season.
- The largest of the draws came from PADD III which has only fallen back to the upper limit of the five-year range.
- Gasoline stocks build for the reported week entirely from a build on the East Coast.
- Imports of gasoline into PADD I were reportedly up a quarter of a million barrels per day week-on-week.
- Demand for gasoline has remained elevated, but did come off somewhat from the near record reported the week before.
Published by PAPCO, Inc. (PAPCO)
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