Winter worries may start early as the supply of distillate and natural gas are the tightest they have been in years with winter ahead. While in recent years Mother Nature has bailed out these markets with warmer than normal winters, this year even a normal winter could drive prices higher.
Already the Energy Information Administration (EIA) is projecting that natural gas bills will be 12% higher and heating oil 17% higher, but based on recent supply data those projections might be on the low end. If we see wintry weather, we could almost see those numbers double.
Just look at yesterday’s distillate number from the weekly EIA report. They reported a massive 5.2-million-barrel drop, putting them 3.6 million barrels below the five-year average. While that might not seem like a lot, consider that back in February supply was 57 million barrels above the five-year average. The trend in supply sharply falling is showing that refiners are having a hard time keeping up with demand even at a time when demand is supposed to be soft. What will happen when winter comes and demand soars?
Nat gas is another concern. While the market is somewhat complacent the supply situation is at a very low level ahead of a winter where we are expected to see record demand. Andrew Weissman of ECB Analytics points out that the natural gas storage trajectory is now on pace for the second-lowest end-of-season level since 2009—increasing market susceptibility to upside price shocks. He says that with La Nina the weather forecasts just turned sharply colder, with space heating demand newly projected to double from 50 gHDDs this week to 97 gHDDs next week. He says that the supply versus demand balance is projected to be much tighter in November and December than a year-ago and five-year average balances—bolstering the likelihood of substantial upward price moves this winter. An assessment that we agree with.
In Yesterday’s EIA report we are seeing a much tighter market in general. The total commercial inventory fell by 12.2 million barrels. This came as U.S. demand spiked by 1.47 million barrels per day to 25.75 million barrels a day. U.S. exports hit another record.
We did see a slight build in crude supply by 856,000 barrels, the first one in 4 weeks as U.S. oil production surged back post-Hurricane Nate. This included a SPR release of 300,000 barrels. Cushing fell by 230,0000 barrels.
Gasoline saw a big 4.4 million barrels drop as U.S. gas demand surged as production fell. Gasoline demand increased 445,000 barrels a day last week.
Reuters reports that Southeast Asia’s net crude oil imports will more than double to 5.5 million bpd by 2040 as the region adds new refining capacity to meet rising demand while regional oil output falls, according to the International Energy Agency (IEA). So global demand risng/ global supply falling/ winter is coming Get Hedged up!