Thursday September 29, 2016
In a day full of surprises, the oil market rocketed higher and posted significant gains in all of the major product categories. The biggest news (and surprise) of all was the formal pledge by OPEC to limit the cartel's oil production at 32.5 million barrels per day, a figure which is several hundred thousand barrels per day less than current production levels. While the rubber stamp will occur at OPEC's next, official meeting (scheduled for late November), and the production trimming won't happen for a few months, the fact that there was an agreement at all shocked most market participants. OPEC has not had any formally announced production cut since 2008, and output has been steadily rising over the past few years (to be fair, so has world demand and the "call" on, or need for, OPEC's oil).
November WTI, which was already up a dollar on the day at the time of the OPEC headline, jumped another dollar in the last several minutes of trading (RBOB and Heating Oil were moving in tandem). Trading volume was enormous, with just under one million November WTI contracts changing hands during the day (equivalent to almost one billion barrels of oil). There was also, oh by the way, the Department of Energy (DOE) inventory summary, which showed surprising draws in crude oil and distillate products, but a large build in gasoline. All in all, quite a unique day.
November WTI was edging higher in the morning, pre-DOE data, though that part of the trading day was long forgotten by the time the market settled. The results of this week's DOE report were as follows:
- Crude Oil - draw of 1.9 MMbbls (versus expected build of 3.0 MMbbls)
- Gasoline - build of 2.0 MMbbls (versus expected build of 0.2MMbbls)
- Distillates - draw of 1.9 MMbbls (versus expected flat)
PADD I (East Coast) gasoline stocks, which were down over 8,000,000 barrels in last week's report (the first which included the effects of the Colonial Pipeline shutdown), were reported to increase week-on-week. Though supplies to the Southeast were still limited last week, it was very weak demand that led to the PADD I gas build. Specifically, gasoline demand was down almost 800,000 barrels per day, week-on-week (Tropical Storm Julia did dump a heap of rain on the East Coast). For a more detailed look at the DOE data, please read the excellent summary below.
For the first hour after the DOE data, the market reacted fairly negatively (gas build), giving back the early morning gains. By mid-day, however, the bulls came out in force and reclaimed market sentiment for the day. November WTI reclaimed $45 and then $46 (up a dollar) by the early afternoon, and then the OPEC news hit the wire.
New, fresh length certainly jumped on the bandwagon, and some of the bears (OPEC naysayers) were left running for the door. At the settle, the wildly volatile day ended with November WTI, up well over two dollars at $47.05 (the highest settle in three weeks and near the top of the recent range). Finished products RBOB and Heating Oil gained cents each, with the front month contracts again outpacing the back (widening the backwardation for RBOB, narrowing the contango for HO). The extreme moves in the products' spreads this month have been fascinating, and impacted by the Colonial Pipeline issue.
- We are fully in the refining turnaround period, as throughputs have fallen nearly 600,000 barrels per day over the last four weeks.
- Distillate production came off over a quarter million barrels primarily from the Midwest and Gulf Coast regions.
- The decline is a week earlier than the historic average would indicate.
- Production of gasoline ticked up slightly, sourced mainly from an increase in the Gulf Coast region.
- Commercial crude stocks continue to draw, at a slower pace. As the refineries come down less crude is entering the processing phase, and we typically begin to see builds in the next week or two.
- Stocks of distillate fuels drew back down nearly to the level prior to last week's build. The draws were seen across the country, but with a nearly 1,000,000 barrel draw out of the Southeast.
- Gasoline stocks built across the board, but are in a drawing trend which historically follows through into November.
Published by PAPCO, Inc. (PAPCO)
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