Latest Market Commentary

May 11, 2017

The propane inventory report showed a bigger build to inventory than the market expected with a build of 1.966 million barrels. The Midwest saw supplies build by 878,000 barrels and the Gulf saw supplies build by 625,000 barrels. Despite the bigger build than expected prices still traded higher. The market is still focused on the big difference between stock levels last year compared to this year. Last year at this time inventories were 73.176 million barrels and after yesterday report of a 2 million barrel build total stock are 41.633 million barrels, 31.543 million barrels less, approximately 43% below last year. If the market experiences something like winter, and you have some grain drying, supplies may get tight and prices could run higher. That scenario is looking very plausible at the moment. Crude traded higher yesterday because of a bigger decline in stocks than anticipated and if crude trades higher that also supports propane prices.

The DOE number for crude and the products was also over all seen as a bullish report supported first by a bigger decline in crude stocks than expected. Crude stocks were down 5.247 million barrels, with Cushing crude stocks down 438,000 barrels. Gasoline stocks were down 150,000 barrels and distillate stocks were down 1.588 million barrels.

US crude oil production was reported at 9.314 million bpd up 21,000 bpd from the previous week. This is strong number and continues the trend of rigs go up and production goes up. This trend mostly driven by US shale production has been one of the headwinds against higher crude prices.

Gasoline demand was 10.125 million bpd up 237,000 bpd and distillate demand was 5.298 million bpd. Both of these are strong numbers for demand.

I have seen some comments about the decline in crude stocks over the last several weeks by roughly 13 million barrels, which is true, but I struggle with the fact that we are still at 522.525 million barrels, 14.038 million above last year. Demand has been good and it will need to continue that way to eat into the current supplies. Crude stocks are above last year at this time, gasoline is right on last year’s levels, and distillate is the one product below the 10 year highs and below last year. The market knew it would take time to bring down supplies and maybe the point is that supplies have begun to move lower which is giving the bulls encouragement that finally all the cuts are starting to have an effect. To add to this is the fact that production has been strong and the US has also been delivering barrels sold out of the SPR and stocks have still been moving lower.

The market has been oversold and bounced back strongly yesterday after the bullish inventory report. The market is trading higher again to still getting follow through. This bounce looks like it has put the market back into its $45 to $60 range even though crude did sell off to a $43.76 low. Hold the current gains into the weekend and this market is likely to set into its trading range. Sell off into the weekend and the chance is still there that another test lower is possible. The market is entering into a higher demand season and that traditionally give prices some support and lets the market run higher into the season. The current bounce could be the start of that normal seasonal advance. The market needs more upside and more time to confirm this so traders will be watching.

Tim Danze, MFA Oil Company Hedging Manager