A narrowing contango* for New York Mercantile Exchange (NYMEX) crude oil futures has curtailed the financial incentive for traders to buy and store barrels, even as U.S. crude inventories look poised to climb further into record-high territory, according to an S&P Global Platts preview of this week’s pending U.S. Energy Information Administration (EIA) oil stocks data.
Survey of Analysts Results:
The below may be attributed to the S&P Global Platts survey of analysts)
- Crude oil stocks expected to build by 3.5 million barrels
- Refinery utilization expected to rise 0.3 percentage points
- Gasoline stocks expected to decline 1.8 million barrels
- Distillate stocks expected to show a drawdown of 700,000 barrels
S&P Global Platts Analysis:
(The below may be quoted in part or full, with attribution to S&P Global Platts Oil Futures Editor Geoffrey Craig)
NYMEX crude's front-month/second-month price spread fell below a 40 cent contango last week for the first time since October. On Tuesday, the March/April spread settled at a 27-cent-per-barrel (/b) contango.
Further out, the front-month/sixth-month contango was 98 cents/b Tuesday, in from over $3/b in mid-January. The front-month/12th-month contango was 85 cents/b, versus an average of $2.85/b the prior 30 days.
A flatter futures curve can be seen as a sign of the supply-demand balance growing tighter, as the market no longer "pays" traders to store surplus barrels.
But while stocks at Cushing, Oklahoma -- delivery point for the NYMEX crude oil futures contract -- have declined five of the last six weeks, the overall trend has actually been moving in the opposite direction.
After six straight weekly builds, U.S. crude inventories reached 518.1 million barrels the week ending February 10, a record-high, according to EIA data.
Analysts surveyed Tuesday by S&P Global Platts expect crude stocks rose a further 3.5 million barrels in the latest reporting week ended last Friday. If confirmed, such would match the five-year average for the same time of year.
U.S. crude oil stocks typically build until the end of April, reflecting subdued levels of refinery demand as facilities conduct planned repairs before the run-up to the summer driving season. But year to date, U.S. crude oil inventories have been building at an even faster rate than normal.
Stocks have risen 39 million barrels, compared with compared with the 2012-2016 average for this period of 17 million barrels.
And despite these clearly bearish fundamentals, time spreads have strengthened and outright prices have held to the plus-$50/b levels. Part of this strength is likely coming from bets that OPEC-led supply cuts will eventually create a tighter market down the road.
Another factor helping to lift the frontend of the curve has been the role of speculators defending their record bullish positions. Rather than head for the exits amid climbing U.S. crude inventories, which could precipitate a steep price decline, money managers have continued to add length.
Money manager length in NYMEX crude equaled 432,594 contracts the week that ended February 14, up from 353,726 contracts about a month earlier, according to the latest U.S. Commodity Futures Trading Commission data.
HOW LONG CAN THE BULLS LAST?
The question remains whether market bulls can hold on the next few months, given a number of obstacles.
For one, crude imports from Saudi Arabia could be expected to trail off in coming weeks, in line with expectations of cuts. Up until now, U.S. imports have remained stubbornly high as tankers, fixed in December before the supply deal went into effect, continue to arrive.
But that decline could be partly offset from the likes of Nigeria, which is exempt from the OPEC deal. U.S. refiners have been interested this year in naphtha-rich Nigerian crude oil grades Agbami and Akpo, trading sources say.
Freight rates have been cheap, encouraging Nigerian imports. Suezmax rates for journey from West Africa to the U.S. Atlantic Coast (USAC) journey were 35% lower in February compared with December, according to S&P Global Platts price assessments.
A rebound in U.S. shale production could also replace barrels missing from OPEC suppliers. After a two-year downturn, shale-watchers have expressed astonishment at the pace of activity just a handful of weeks into 2017.
Oil rig counts have ballooned, particularly in the Permian Basin of West Texas and New Mexico where last week 303 rigs were working, up more than 13% from the start of the year and 130% since the activity trough last April.
Total oil rigs have risen nearly 90% to 597 last week after bottoming at 316 in May 2016.
Seasonally weak refinery demand also looms as a barrier. Refinery utilization fell the week ending February 10 to 85.4% of capacity, down from 93.6% the week ended January 6, reflecting winter maintenance.
Refinery utilization was expected to tick up 0.3 percentage point last week to 85.7% of capacity. A year ago the run rate equaled 87.3%.
GASOLINE DRAW EXPECTED
While utilization could be expected to rise as units are brought back online from planned repairs, a major issue looming over U.S. refiners is record high gasoline stocks.
While inventories typically increase in the winter when demand is at its weakest, the builds this year have been larger than normal.
EIA data pegged U.S. gasoline stocks at 259 million barrels the week ending February 10. Over the last seven reporting periods, stocks have increased 32 million barrels, compared with 17.7 million barrels from 2012-16.
Analysts are looking for gasoline stocks to have fallen 1.8 million barrels for the latest reporting week. If confirmed, that would fall short of the 2.3 million barrel decline seen on average from 2012-16 the same time of year.
Some portion of the stocks in storage represents winter-grade gasoline, which traders have been trying to unload before the pending transition to summer-grade gasoline.
NYMEX March reformulated blend stock for oxygenate blending (RBOB) futures contract has traded at a steep discount relative to the April contract, as the latter requires the delivery of summer-grade RBOB. The March/April spread has averaged 22 cents/gal this month.
Given the overhang of stocks, exports will be an important factor in determining whether inventories can return to historical levels.
Fixtures were heard last week of gasoline moving from the USAC to West Africa, which is highly unusual because the USAC is typically a gasoline-importing region.
"U.S. Atlantic Coast unleaded is the cheapest in the world right now, so if they are able to make the West African specs, it makes sense to move it there," a shipping source said.
S&P Global Platts data shows New York Harbor RBOB cargoes at a discount to cost, insurance and freight (CIF) West Africa cargoes since January, creating a rare export opportunity.
USAC gasoline stocks sit at 76.3 million barrels, a 17% surplus to the five-year for this time of year, EIA data shows.
On the Gulf Coast, stocks of low- and ultra-low sulfur diesel (ULSD) fell to 45.3 million barrels the week ending February 10, which was on the lower end of the range where inventories have been so far this year. One factor helping draw stocks lower has been exports, as demand for ULSD as well as gasoil, has been strong of late from customers in the Mediterranean region.
Ongoing refinery maintenance in the Mediterranean has kept supplies tight, pulling cargoes from the U.S., particularly as clean tanker freight rates for that journey remain well-below the levels seen in late December.
Petronor has been conducting major repairs at its 220,000 b/d refinery in Bilbao, Spain since January 16, although the facility is expected to be back in full operation by February 28th.
ExxonMobil shut its 136,000 b/d refinery at Fos-Sur-Mer, France. A tanker was seen leaving Exxon's Baytown, Texas facility last week on its way to Fos-Sur-Mer near Marseilles, according to S&P Global Platts trade flow software, cFlow.
On paper, the economics for moving ULSD from the Gulf Coast have looked favorable recently. The spread between delivered USGC ULSD to CIF Mediterranean cargoes flipped to a discount February 7 on a 10-day moving average, according to data from S&P Global Platts.
Analysts expect U.S. distillates stocks to show a decline of 700,000 barrels for the week ended last Friday, compared with the five-year average, which showed a decline of 1.3 million barrels.
For more information on crude oil, visit the S&P Global Platts website.
* Contango* is the industry vernacular for the condition whereby prices for nearby delivery are lower than prices for future-month delivery.