NEW YORK (January 16, 2018) – Tightening US crude stocks recently turned NYMEX crude's nearby term structure to backwardation, which could attract even more speculative length into the market and help sustain higher prices, according to a Tuesday 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 stocks expected to fall 425,000 barrels
* Refinery utilization expected to decline 0.5 percentage points
* Gasoline stocks expected to build 2.7 million barrels
* Distillate stocks expected to fall 850,000 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)
For the first time since late 2014, traders can make money by rolling long positions from the expiring contract into the soon-to-be prompt contract.
This switch from contango to backwardation has held since January 3, following consistent declines in US crude stocks.
Analysts surveyed Tuesday by S&P Global Platts were split on the direction that stocks took last week, with the average estimate equaling a decline of 425,000 barrels.
If confirmed, that would mark the ninth straight draw, and further reduce the size of the surplus relative to the five-year average, which equaled 7.6% the week ending January 5.
Stocks at Cushing, Oklahoma -- the delivery point for the NYMEX crude contract -- have fallen eight of the last nine weeks by nearly 18 million barrels to 46.578 million barrels, the fewest since February 2015.
US crude stocks increased by 1.5 million barrels on average for the same reporting period as last week. January typically marks the start of a seasonal decline in refinery demand because of planned repairs.
A recent bout of frigid weather across the eastern half of the US that lasted for about two weeks beginning Christmas created an incentive for refiners to delay maintenance.
In fact, US refinery utilization reached its highest point for 2017 in the last week of the year at 96.7% of capacity.
Analysts are looking for the utilization rate to have declined by 0.5 percentage points last week to 94.8% of capacity. A year ago, the run rate averaged 90.7% as a mild winter dampened heating fuel demand.
Solid refinery activity has been one component behind the ongoing streak of crude draws, which in turn have helped keep alive an oil rally that has lifted prices to their highest levels since December 2014.
BACKWARDATION REWARDS LENGTH
At some point soon, US crude stocks should start building because of winter maintenance, and when that happens, selling pressure could emerge.
One potential counterweight could be speculative length among traders who are attracted to NYMEX crude partly because of the backwardated structure.
Money manager length in NYMEX crude already reached a record-high 463,262 contracts on January 9, according to the latest data from the US Commodity Futures Trading Commission.
With group's short position at just 30,612 contracts, money managers have become disproportionately weighted in favor of length.
That has created some downside price risk if oil prices start to waver and traders rush to liquidate length, which could exacerbate declines.
But if NYMEX crude's term structure can remain backwardated, that might convince some speculative length to stay the course.
On Tuesday afternoon, the February/March spread was backwardated by 3 cents/b, in from 7 cents/b Friday and an average of 8 cents/b since January 3.
DISTILLATE DRAW EXPECTED
The flip side to less refinery output at this time of year is seasonal draws in distillate stocks, though the prolonged period of gasoline inventory declines usually does not get underway for another month.
Analysts expect gasoline stocks rose 2.7 million barrels last week. The five-year average shows an increase of 3.8 million barrels.
Analysts expect distillate stocks fell 850,000 barrels last week, versus an average draw of 920,000 barrels for the same period from 2013-17.
That would mark just the second decline over the last nine weeks, as distillate production has proved more than sufficient to satisfy demand so far this winter.
Distillate production averaged an all-time high of 5.592 million b/d the week of December 29, the same day the NYMEX ULSD crack spread against WTI spiked above $27/b for the first time since March 2015.
With the cold snap lifting, the ULSD crack has been falling. It was around $23/b Tuesday afternoon, still firmly within the $22-$25/b range in place since October until the spike higher.
The main driver behind the ULSD crack's decline has actually been crude strength, rather than diesel weakness.
Prompt NYMEX ULSD jumped from about $1.95/gal before Christmas to more than $2.08/gal by January 3, its highest level since February 2015.
That contract dipped to $2.04/gal early last week, but has since held above that line. NYMEX February ULSD was 1.75 cents lower Tuesday afternoon at $2.0675/gal.
NEW YORK HARBOR DIESEL MARKET
The strength in the New York Harbor has possibly even attracted cargoes from the Persian Gulf. Around 450,000 mt of diesel could land in New York this month, according to data from Platts trade-flow software, cFlow.
Five LR2-sized vessels, each carrying around 90,000 mt, all loaded from East of Suez locations and are en route to New York.
While the economics appeared to work for tankers leaving the Persian Gulf, the arbitrage from Northwest Europe to New York has diminished, leading some vessels that were on their way to reverse course.
The spread between NYMEX ULSD and ICE low sulfur gasoil futures, known as the HOGO, widened more than 4 cents/gal over a two-week period to 14.5 cents/gal by December 29, but has since declined.
* Reformulated blend stock for oxygenate blending (RBOB) futures contract, the biggest premium to the front-month contract since late August.
* Implied demand is the amount of product that moves through the U.S. distribution system, not actual end consumption.
* Contango* is the industry vernacular for the condition whereby prices for nearby delivery are lower than prices for future-month delivery.
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