Recent Surprises Turn Oil and Gas Market Bullish

Article by Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

Addressing recent events transforming the U.S. oil and gas market

Inventory Decreasing

Unexpected surprises continue for the U.S. gasoline market in 2016, this time with gasoline prices underpinned as an inventory surplus was sharply cut. The East Coast has been affected in particular, with gasoline supply plummeting from a 36-year high to a 21-month low.

With record high gasoline production holding supply well above the historical average in 2016, what has finally shifted the market from bearish to bullish?

OPEC Production Cuts

With an ongoing imbalance threatening to press global oil prices lower still, OPEC decided on Sept. 28 to cut production. Admitting that the imbalance of global oil supply-demand would indeed continue well into 2017, the 14-country member finally agreed to reduce production – the first cut in eight years.

Beginning this November, OPEC ministers have agreed to a production range between 32.5 and 33.0 million bpd in contrast to their August output of roughly 33.3 million bpd. Details to these cuts will come about when OPEC meets in Vienna on Nov. 30.

Colonial Pipeline Leak

On Sept. 9, a leak was found on the Colonial Pipeline’s 36-inch gasoline main line 1 in Alabama that disrupted service. Not returning to full service until Sept. 21, the Southeast north through the mid-Atlantic saw limited new gasoline supply which led to steep drawdowns in regional stocks.

This caused supply shortages, namely in the Southeast..

Natural Disasters

The first hurricane in 11 years to make landfall in Florida, hurricane Hermine disrupted shipping lanes and sea-to-shore off-loading after it hit on Sept. 2. This natural disaster drew dawn East Coast gasoline supply 2.284 million bbl to 64.894 million bbl during the week ending Sept. 2 and another 884,00 bbl by Sept. 9.

Both the pipeline and hurricane disruptions occurred in the midst of transition when refiners were moving out summer grade product to make room for winter grades – leading to a drop of nearly 6.0 million bbl in PADD 1C, the Lower Atlantic, according to the EIA. This drop in the region’s supply was the largest on record and well above the previous large drawdown in June of 2003 of 2.9 million bbl.

National Gasoline Outlook – Supply Demand Leveling

In light of a second hurricane in the past two months, this time Matthew – category 4, shipping lanes and pipeline service had again been disrupted. With East Coast supply taking another hit, gasoline prices have increased as decreasing supply combats the imbalance seen over the past year. This decrease in supply and climb in price has been another bullish factor underpinning higher fuel prices.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

US Gasoline Market’s September Surprise(s)

Article by Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

In a year when soothsayers’ crystal balls are as foggy as London in November, September encompassed a few unexpected surprises for the US gasoline market that underpinned gasoline prices and sharply cut down an inventory surplus. This was especially true for the East Coast, where gasoline supply plunged from a 26-year high to a 21-month low.

At $1.4631 gallon, Reformulated Blendstock for Oxygenate Blending futures traded on the New York Mercantile Exchange ended the third quarter 20cts higher than in 2015 and flat with the end of the second quarter. The gasoline contract advanced nearly 15cts gallon on the spot continuous chart from the end of July–the height of peak season demand, with implied gasoline demand averaging 6.7% above the five-year average from Memorial Day through Labor Day.

Speculators in late September where far more bullish then in late July, moving to a 63,592 net-long position in NYMEX RBOB futures as of Sept. 27 data from the Commodity Futures trading Commission shows, which was the largest long position for the noncommercial group since a week before the start of Memorial Day on May 23. The noncommercial group made a 43.8% net-change in their long stance from the middle of summer, adding 19,378 futures contracts to the long side of their ledger since July 25.

Two well publicized events and a hurricane transformed the bearish oil market briefly experienced in early August, while another powerful hurricane, Matthew, has the potential to disrupt shipping lanes along the eastern seaboard in October.

OPEC Production

Initially, it was seen mostly as empty rhetoric and posturing as oil ministers with the Organization of the Petroleum Exporting Countries discussed production cuts in August and September to help stabilize the oil market, where an ongoing imbalance threatens to press global oil prices lower. Growth in world oil demand was slowing, inventory continued to build, and production was well above previous expectations. Indeed, OPEC was producing at an eight-year high, with Saudi Arabia at an all-time high, while output from non-OPEC producer Russia was near a post-Soviet high. US crude output declined less than expected, and producers were reactivating oil rigs, with the US rig count reaching a 7-1/2 month high in ending September, according to Baker Hughes, Inc.

Yet, OPEC reached a consensus to cut production on Sept. 28, admitting that a global oil supply-demand imbalance would persist well into 2017 without action by the 14-country member producer group, pushed back from previous forecasts for the market to find balance during the second half of this year. The OPEC agreement to cut production is the first in eight years.

OPEC ministers agreed to a production range between 32.5 and 33.0 million bpd from their August output of roughly 33.3 million bpd, but will leave the details on how those cuts will come about when they meet in Vienna on Nov. 30. The reduced production would begin in November, another feature that has some analysts downplaying the news. However, the Saudis are seen shouldering most of the cuts, and are said to be concerned that a low oil price would diminish their expected return from a 2017 planned initial public offering for a stake in Saudi Aramco.

A leak found Sept. 9 on Colonial Pipeline’s 36-inch gasoline main line 1 in Alabama, which didn’t return to full service until Sept. 21 when a bypass around the leak was placed into service, limited gasoline supply in the Southeast north through the Mid-Atlantic, prompting sharp drawdowns in regional supply. The roughly 1.272 million bpd main line 1 originates in Houston, Texas, and ends in Greensboro, North Carolina, where it interconnects with main lines 3 and 4 on the Colonial system, with line 3 running north to Linden, New Jersey.

Total PADD 1 East Coast gasoline supply was drawn down from a 72.493 million bbl 26-year high reached July 22 to 55.535 million bbl on Sept. 16, the lowest supply point for the region since December 2014.

Weather and Gasoline Supply

Hurricane Hermine, which on Sept. 2 was the first hurricane in 11 years to make landfall in Florida, disrupted shipping lanes and sea-to-shore off-loadings. East Coast gasoline supply was drawn down 2.284 million bbl to 64.894 million bbl during the week ended Sept. 2 and by another 884,000 bbl by Sept. 9.

The hurricane and pipeline caused declines also occurred during the transition to higher Reid vapor pressure gasoline, when refiners move out summer grade product to make room for winter grades. Yet, EIA notes during the week ended Sept. 16, gasoline supply in PADD 1C, the Lower Atlantic, dropped nearly 6.0 million bbl to 22.0 million bbl. Before that decline, the largest weekly draw for Lower Atlantic states was 2.9 million bbl in June 2003.

This week, market followers will follow the path of Hurricane Matthew, which reached Category 4 strength on Oct. 2 when situated just south of Jamaica. Current forecasts show a path for the slow moving storm along the Atlantic Coast, which would again disrupt shipping lanes.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.