Oil Note: Monday 15, 2016
Summary of Weekly Petroleum Data for the Week Ending February 5, 2016 (EIA)
U.S. crude oil refinery inputs averaged over 15.5 million barrels per day during the week ending February 5, 2016, 105,000 barrels per day less than the previous week’s average. Refineries operated at 86.1% of their operable capacity last week. Gasoline production increased last week, averaging about 9.6 million barrels per day. Distillate fuel production decreased last week, averaging about 4.4 million barrels per day.
U.S. crude oil imports averaged over 7.1 million barrels per day last week, down by 1.1 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, 5.0% above the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 683,000 barrels per day. Distillate fuel imports averaged 201,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.8 million barrels from the previous week. At 502.0 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 1.3 million barrels last week, and are well above the upper limit of the average range. Finished gasoline inventories remained unchanged while blending components inventories increased last week. Distillate fuel inventories increased by 1.3 million barrels last week and are near the upper limit of the average range for this time of year. Propane/propylene inventories fell 3.3 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories increased by 0.3 million barrels last week.
Total products supplied over the last four-week period averaged over 19.8 million barrels per day, up by 0.3% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged 8.9 million barrels per day, up by 2.6% from the same period last year. Distillate fuel product supplied averaged 3.6 million barrels per day over the last four weeks, down by 15.8% from the same period last year. Jet fuel product supplied is up 6.8% compared to the same four-week period last year.
Central Banks around the world are experiencing the negative feed back loop of cheap money in the form of deflation. Since 2009, Quantitative Easing programs, in the US have produced the Shale revolution overtaking OPEC as well as Russia to become the top producer globally. Since the end of Quantitative Easing 3 deemed “QE3” in 2014 as well as OPEC oversupplying the market to thwart the continued expansion of US Producers, the race to the bottom has driven oil markets to a -77% in FY’16.
At the moment, there is more oil production than demand. Several ways to resolve the problem: stimulate demand or cut production. Last week, Wood Mackenzie released a report citing around 4% of global supply is unprofitable <35 WTI. 4% of global supply equates to 3.4 million barrels per day, which would cure the 1.5 million barrels per day global oversupply. Majority of US Shale Producers are underwater <40. We note, on WTI chart in FY’15 mid-40 levels were a highly defended area as price oscillated throughout the fiscal year. Since FY’14, US Rigs have dropped -68% as budgets contract and investments have slowed due today’s fair value of WTI. Many US Producers are taking a loss, but continue to pump with hopes of a rebound in prices. Some highly leveraged Shale producers have to continue to pump or face a whirlwind of pressure from their bondholders. This is evident in the high yield debt space as 2009 levels have been reached.
As mentioned, US Rig Count plummets -68% since FY’14, and we note US production is laggard. This is due to the US Producer(s) refocusing Rigs to oilfields where the production cost is lower. US Production since 2H15 has fallen around -5% according to EIA via Quandl.com. The US production has experienced peak production, but the main concern is oil storage hitting an 80-year high. Cushing is near capacity as the fear is visualized in /ILT (NYMEX) oil storage futures nearly doubling in FY’16. If it couldn’t get worse, last week’s fire sale of WTI to the 26 handle could have started with Phillips 66 dumping Cushing crude for immediate delivery. The front month spread is abnormally wide showing stresses in the near term market.
Stresses in the WTI front month can also be seen in the spread of Brent vs. WTI widening. Late FY’15, the spread was at parity, but as of current date a divergence has edged BRENT up 3.73. Even with WTI draw last week in inventories, it seems as the market is waiting for consecutive weeks before the draw is taken serious.
As the race to the bottom continues, OPEC members and their Sovereign Wealth Funds continue to feel the pressure of <30 oil. OPEC members on Jan 22, 2016 told the world their issues and said they were ready to discuss. Fast forward to February 11, 2016, OPEC states everyone is ready to cooperate. Breaking moments ago Russia is to meet with major OPEC members including Saudis, Venezuela, and Qatar. We are eager to hear what transpires from the meeting. Next theoretical statement for a bullish attitude would be the mention of production cuts. Comments and meetings are months ahead of the typical OPEC meeting held annually.
The oil market is a two sided coin: Supply/Demand and Geopolitics. In an unprecedented Geopolitical event this weekend of Turkey and Syria spiraling out of control, we conclude the oil market cannot ignore this debacle. Turkey decides to shell Northern Syria, as the Russian’s work in lock step with the Syrian Government to retake strategic regions of Syria. Meanwhile, the Saudi’s have built the largest coalition ever in the Middle East comprising of 20 countries currently drilling in Saudi Arabia. At the same time, the Saudi’s are transporting personnel and supplies to Turkish air bases, which many think a ground invasion by the coalition is on the horizon. US is absent on the boots of the ground, but Kerry is striving for a cease fire deal. This seems highly unlikely, after the shelling and minor ground invasion by Turkey was seen over the weekend. As the West tries to de-escalate the situation by Merkel supporting a No-Fly-Zone to counter the Russian’s with Assad, we saw a tragedy unfold as a “supposed” Russian Airstrike hit a Doctor W/O Boarders facility. There are many sides involved in the fight, but to narrow down who is involved comes down to Saudi Arabia’s Coalition called Northern Thunder (Hint of the West) versus Assad and the Russians. Cold War could meet Hot War as the weekends events spiral out of control.
Wave 1 timeframe 8-27-13 to 11-27-13. Counter Wave 2 timeframe 11-27-13 to 6-12-14. Wave 3 timeframe 6-12-14 to 3-18-15 extended from Upper rail of descending channel to beneath centerline. Counter Wave 4 timeframe 3-18-15 to 5-5-15 tests beneath centerline. Wave 5 timeframe 5-5-15 rejected centerline channel extending to lower channel rail finding resistance low 26. Low 26 is a major level of defense as 1.618 extensions from wave 3 end extended into 29. The probability of a counter A-B-C wave is likely once primary wave count 5 is ended. 25 days of support at 26-35 regions. Breaking moments ago, Analysts from Goldman Sachs are on Reuters saying that oil prices don’t have much further to materially fall. Goldman is referring to the 5th wave ending a possible counter structure to start in the near term after 900 days of the 1-3-5 impulse and 2-4 counter Elliot wave structure which is responsible for the -77% of WTI.
Mathematically, we measure price and time with the GANN Analysis starting with the focus point of the second wave count end of 107 level 6-12-15 range. The market continues to lack balance and is currently in a weak position. Even though, the market has strived to balance reclaiming ½ GANN as support on the lower channel demand line. Rule of Angles states that once an angle is violated the next angle it’ll move towards. On deck is for a balance of 1/1 GANN, but current fundamentals in WTI/BRENT do not support 1/1 migration this FY. The GANN fractions equate to Units of Price per Unit of Time.
On an intermediate timeframe, the primary 5th wave has seen nearly 30 days of resistance with a single print TPO at 26. The 30-day resistance is forming a geometrical formation notable for a reversal called a right angle descending broadening structure. Precedents of structure are 51% upward breakouts according to Bulkowski. The geometrical formation is producing a balance area with rotations of 30.63 point of control. The parameter’s of the VA area or balance is 27-35. The geometrical formation sits on wave 3’s 1.618 extensions adding a thesis for supportive area. We advise the market participants to understand the structural composition of the right angle descending broadening structure as well as understand all aspects of the balance area. Rotations of this balance will continue until the balance is mature, which will lead to an imbalance. As the balance area matures with a 30.63 point of control, and a notable structure for reversal, we expect a counter trend to start and our EOY’16 Price Target is 46 reversion. As of now, play the rotations of the 30.63 balance.