Fundamental Friday: 25 March 2016

Crude oil: Production of crude oil dropped by 30,000 b/d this week accelerating a trend that appeared to have flattened in the past month. The decrease in output is accompanied by a drop in refinery inputs by about 180,000 b/d. The current pattern reflects a peak of refinery inputs, which almost reached 16 million b/d, quickly giving way to the maintenance season. The drop in production is most likely oil firms' response to less demand for their immediate, extracted crude. Look for inputs to fall more as refineries close and weekly production to continue to respond in tandem.

Stocks of crude oil grew by about 9.4 million barrels from last week. The gains were sharper this week because of the reduction in inputs forcing more crude oil into storage. The trend continues to be bearish on price, but the retraction of the export ban could release some of the pressure on growing stocks. In an Energy Information Agency report, U.S. petroleum exports increased by 467,000 b/d over the 2015 year. If this trend holds for the 2016 year, U.S. producers could find supply problems soften as their oil finds more foreign customers. Finished products accounted for most of the growth in exports, but a lifted ban will allow crude oil exports to significantly contribute to the increases in foreign shipments.

After prices peaked at about $41 last week, trading brought the WTI spot price lower to $39.46 by the end of this week. For Brent crude, spot price trading stopped at $41.05

Natural gas: Unlike crude oil, production of natural gas appeared to increase with total operating rigs jumping to 92 this week. With these extra rigs coming online, natural gas rigs now account for 19.8% of total active rigs. Stocks grew in tandem with the rig trend. The EIA estimated that 15 bcf of gas was added to underground storage last week.That gain puts stocks 68.9% higher than last year and 51.4% higher than the five-year average.

Overall, the EIA surmises that daily weekly supply in North America increased by 1.35% from last week. In the same report, an estimation of last week's demand growth came in at 8.7%. Most likely, this trend is being encouraged by the new popularity of natural gas for electricity generation. The leading energy agency in the U.S. expects gas to become the dominant input for generating power. An exact forecast has natural gas accounting for 33.3% of 2016 electricity, topping, for the first time, coal which will account for 32.0%. Because of these expectations, demand for natural gas should steadily rise. Producers should build and maintain stockpiles above the 5-year trend as the price starts to stabilize and slowly rise.

Henry Hub contracts opened above $2.00 at the beginning of this week. Five straight losing trading sessions dropped the spot price $0.13 to $1.882 by the end of the week. Supply and weather trends still weigh on sentiment.

Gasoline: Stocks of finished motor gasoline fell by over 600,000 barrels this past week reflecting the drop in outputs that comes with the maintenance season. Component fuels doubled the losses of last week with a 4 million barrel decrease this week. Both stockpiles continue to drift well above historical averages due to the impending glut. Finished gas production dropped by about 400,000 b/d after growing by the same magnitude the week before. Product supply, a crude estimation of consumption, remains stable with a small gain of about 140,000 b/d. Demand still seems quite robust with the product supplied 3.74% higher than a year before.

Regular and diesel gasoline prices finally reach $2.00 a gallon this year. The growth in price is mostly supported by the average price in PADD 5 (West Coast) reaching $2.480 a gallon. The overall U.S. reached $2.007 a gallon, still down $0.45 from a year ago. Diesel prices only grew $0.02, or half of what regular prices did. The spread between regular and diesel prices continues to shrink amidst supply concerns.


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