Fundamental Friday: 13 May 2016

Crude oil: Crude oil production continues to fall for the 9th straight week continuing to justify the recovery in prices. With a drop of 23,000 b/d, last weeks production came in at 8.802 million b/d. Further declines of 300,000 b/d over the next couple of months will put output levels at July 2014 levels. The WTI spot price was above $100 per barrel then. Stockpile data this past week has reached a potential reversal point. A decline of about 3.4 million barrels to 1.235 billion barrels marks the first draw on inventories after four straight weeks of surplus. Since the beginning of the year, 58 million barrels of crude oil have been stored away despite reductions in downstream operations. Keep an eye on stock change over the next couple weeks to see if this reversal represents a shift in crude oil fundamentals.

Refinery inputs jumped by 190,000 b/d to 16.18 million b/d adding onto gains at the end of April. In fact, last week's input levels are already above the April average perhaps responding to the start of the summer driving season. Utilization fell by 0.7 percentage points to 89 percent. The contradicting readings this week broke a streak of parallel movement showing the flattening trend in upstream operations. Refinery capacity may be expected to increase above 90 percent for the summer especially since gas prices have been in an uptrend. Last year, summer utilization peaked at 96.1 percent at the end of July.

Crude oil prices continue to build a larger recovery this week as a 5-day gain of 3.52 percent extends 3-month gains to 31.19 percent. Despite losses of just under 1 percent on Friday, WTI crude trades around $46.27 and Brent crude at $47.87.

Natural gas: Underground storage of natural gas continued to build as seasonality weighs on demand. A jump of 56 bcf brought last week's total to 2,681 bcf total. Also, natural gas rigs jumped by 1 to a total of 87 this week, the first net gain in over 5 weeks. Markets continue to be oversupplied despite slightly lower temperatures that are 8 percent lower than last year. Suppliers have their eyes on the January 2017 futures contract as they try to gauge what winter's demand will be like this year. Currently, the premium averages just above $1.10 per MMBtu more than double the $0.52 per MMBtu gap last year.

This week, energy companies have had to cope with wildfires near the oil sands plays located in Alberta, Canada. The disruption of operations has caused a decrease in demand for local natural gas which sent Canadien spot prices lower for a small period. The EIA reported that most of the decreases in consumption were caused by evacuated oil mining operations which natural gas heavy processes. No pipelines or facilities were damaged so offline systems should be brought back online soon.

Despite wildfires in Alberta, the natural gas Henry Hub spot price adds 2.1 percent this past week. Gains of 8.79 percent over the past month have natural gas trading around $2.286 on Friday.

Gasoline: Gasoline fundamentals this week reflected the acceleration of refinery capacity. Finished gasoline stocks jumped just over 100,000 barrels to 24.985 million barrels. Component gasoline stocks fell sharply by almost 1.4 million barrels to land at 215.579 million barrels total. Both have started new trends that could continue into the summer weighing on gas prices. Finished gasoline production grew by 240,000 b/d to 10.051 million b/d this past week. Since the beginning of April, refinery production has been up over 400,000 b/d to reach the 10 million level. Product supplied fell by approximately 300,000 b/d to 19.952 million b/d.

Prices at the pump stabilized this week as refinery output increased supply. The average U.S. regular gas prices fell by $0.02 to $2.22 a gallon. Mixed movements across the United States caused a small reversal of the recent trend with prices in the Midwest applying the most pressure. Average diesel prices held flat with just a $0.005 increase to $2.271 per gallon. Most regions had little to no change.