Weekly Energy Market Situation, June 5, 2017

Large Banks Lower WTI Price Outlook

Expect 2017 price to stall at $55
Market factors for 2018 bearish—higher crude oil supply inevitable
End-2020 price forecast at $60
Slew of new natural gas supply could limit price recovery in 2018

Sincerely,

Alan Levine, Chairman of Powerhouse

The Matrix

The reaction of several large financial institutions to the OPEC-non-OPEC agreement can be seen in recent revisions to their West Texas Intermediate (WTI) crude oil price projections—downward revisions.

One bank has lowered its 2017 year-end 2017 WTI price forecast to $55 per barrel from an earlier estimate of $60 per barrel. Lower prices are projected despite expected improvements in seasonal product demand and extension of the OPEC-non-OPEC production cuts. The decline to $55 would have been greater except for expectations that global inventories will fall about 100 million barrels during the rest of 2017.

This pattern raises troublesome issues for bulls in price forecasts for 2018. The extension of the OPEC-non-OPEC agreement ends in March 2018. The agreement has been in effect historically very long. Even with full compliance, recovery of output would be likely.

The issue is complicated by the success of non-OPEC producers—not part of the agreement—that are accelerating their output even now. U.S. out reached a new high for the week ending May 26. According to the Energy Information Administration (EIA), production reached 9.342 million barrels daily.

“U.S. crude oil production averaged an estimated 8.9 million b/d in 2016. U.S crude oil production is forecast to average 9.3 million b/d in 2017 and almost 10.0 million b/d in 2018. EIA estimates that crude oil production for April 2017 averaged 9.1 million b/d, which is 0.2 million b/d above the April 2016 level and 0.6 million b/d above the recent monthly average low reached in September 2016.”

On balance, prices for 2018 are expected to remain around $55 per barrel. Longer term, forecasts of $70 per barrel by 2019 – 2020 have also to be rethought. Growth in shale output, moderation of demand and some production efficiencies seem likely to inhibit price gains. Accordingly, these forecasts have been lowered to $60 at end-2020.

Supply/Demand Balances

Supply/demand data in the United States for the week ending May 26, 2017, were released by the EIA.

Total commercial stocks of petroleum decreased 5.2 million barrels during the week ending May 26, 2017.

Builds were reported in stocks of fuel ethanol, K-jet fuel, distillates and propane. There were draws in stocks of gasoline, residual fuel and other oils.

Commercial crude oil supplies in the United States decreased to 509.9 million barrels, a draw of 6.4 million barrels.

Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks fell 1.3 million barrels, PADD 2 (Midwest) stocks declined 0.8 million barrels, PADD 3 (Gulf Coast) stocks retreated 4.5 million barrels and PADD 4 (Rockies) stocks decreased 0.4 million barrels. PAD District 5 (West Coast) crude oil stocks increased 0.7 million barrels from the previous report week.

Cushing, Oklahoma, inventories decreased 0.8 million barrels from the previous report week to 64.8 million barrels.

Domestic crude oil production increased 22,000 barrels daily to 9.342 million barrels per day.

Crude oil imports averaged 7.985 million barrels per day, a daily decrease of 309,000 barrels. Exports rose 678,000 barrels daily to 1.303 million barrels per day.

Refineries used 95.0% of capacity, an increase of 1.5 percentage points from the previous report week.

Crude oil inputs to refineries increased 229,000 barrels daily. There were 17.510 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 277,000 barrels daily to 17.679 million barrels daily.

Total petroleum product inventories saw an increase of 1.2 million barrels from the previous report week.

Gasoline stocks decreased 2.9 million barrels; total stocks are 237.0 million barrels.

Demand for gasoline rose 118,000 barrels per day to 9.822 million barrels daily.

Total product demand decreased 38,000 barrels daily to 20.757 million barrels per day.

Distillate fuel oil supply grew 0.4 million barrels to 146.7 million barrels. National distillate demand was reported at 4.025 million barrels per day during the report week. This was a weekly decrease of 335,000 barrels daily.

Propane stocks rose 3.4 million barrels; total stocks are 47.1 million barrels. Current demand is estimated at 927,000 barrels per day, an increase of 15,000 barrels daily from the previous report week.

Natural Gas

According to the EIA:

For the week ending May 25, 2017, excluding the effects of [reclassified] non-flow inventory adjustments, there were implied flows into storage of 85 Bcf…Natural gas inventory reclassifications often occur as the result of engineering studies or reassessments of the operational capabilities of the storage facility.

Smaller-than-average net injections into working gas storage were reported in all regions of the Lower 48 states. Net injections into storage totaled 81 Bcf compared with the five-year (2012 – 2016) average net injection of 97 Bcf and last year’s net injections of 80 Bcf during the same week.

Working gas levels are 13% lower than last year’s record levels, but well ahead of the five-year average. Working gas stocks total 2,525 Bcf, which is 225 Bcf more than the five-year average and 370 Bcf less than last year at this time.

Structural developments in the natural gas markets are raising doubts that prices could move much higher in 2018. New pipeline and other infrastructure projects are expected to increase the contribution of natural gas to the market from the Marcellus and Utica plays. Moreover, gas production in the Permian could potentially triple by 2020 compared with 2010. Nonetheless, backwardation in the futures price curve remains a bullish sign for 2018.

Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged.” A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit—this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.

Powerhouse is a registered affiliate of Coquest, Inc.

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