Unbalanced Fuel Demand… Reuters…

by Jim Colburn • Thursday, March 31, 2016

John Kemp, Reuters, discusses the problems refiners have due to unbalanced fuel demand here:


“The nightmare for refiners is when consumption of different fuels and other refined products grows at different rates, leaving them struggling to make enough of some items and too much of others.

The problem at the moment is with surging demand for gasoline in the United States as well as a number of other countries, including India, while demand for distillate and other products is growing far more slowly.  To meet gasoline demand from motorists, refiners have to process increased volumes of crude, leaving them with unwanted stocks of hard-to-sell distillates and other products.

U.S. gasoline consumption increased by 240,000 barrels per day last year while consumption of all other refinery products rose by just 50,000 bpd, according to the EIA.”

And, from a days supply perspective:

“In terms of demand, however, gasoline stocks are currently enough to cover 25.8 days worth of consumption at current rates, only slightly higher than the 25.6 days this time last year.

Stockpiles are higher than the long-term average of 24.5 days and towards the top end of the 10-year range of 22.1 to 26.1 days but they still seem reasonable and are moving in line with normal seasonal trends.

Overall, the U.S. gasoline market appears to be broadly balanced, with refinery production in line with elevated consumption. But the rest of the fuels market is far out of balance.

U.S. distillate stocks are currently equivalent to almost 44 days worth of consumption, a record for the time of year, and far above the normal 32 days.

Jet fuel stocks have risen to more than 29 days, well above the long-term average of 26 days, and while still within the 10-year range, the oversupply is climbing rapidly.

Stocks of propane and propylene are at a seasonal record. Stocks of residual fuel oil are down compared with 2015 but still above normal for the time of year.”

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Emanuel Derman, Columbia University on mathematical models… Bloomberg

by Jim Colburn • Thursday, March 31, 2016


“Columbia University’s Emanuel Derman weighs in on the bell curve model and neo-classical finance on Bloomberg Surveillance with Tom Keene and Michael McKee”…

When Derman gets to talk, his comments are excellent!  The podcast says 20 minutes in length, but with commercials, news and a loquacious interviewer, Derman doesn’t get much time.. However, his chat on mathematical models is worth the listen… We taught this stuff (basically that complex math does a poor job modeling market behavior, but still can be useful) in our options classes back in the mid to late ’80’s (and still do!)… By the way, in 2014, Lloyd Blankfein was interviewed by Charlie Rose and had some interesting things to say on risk, starting at about 40 minutes left: http://www.hulu.com/watch/647659 “98% of my time is worrying about 2% of the worst contingencies”…

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More on gasoline demand… WSJ

by Jim Colburn • Thursday, March 31, 2016

As we have noted, demand for gasoline is picking up… Here is today’s WSJ (http://www.wsj.com/articles/thirst-for-gasoline-fuels-oil-rally-1459391248):

“Several factors have combined to produce a rise in gasoline consumption, including an unusually mild winter and an economy that added more than 200,000 jobs in both February and March. Consumers also are buying more sport-utility vehicles and trucks, which burn fuel less efficiently. Meanwhile, pump prices are among the lowest in 12 years.

The result: U.S. gasoline demand hit record levels in March. Government estimates released Wednesday show consumption averaged more than 9.4 million barrels a day in the four weeks that ended Friday. That is a level usually found only during peak summer driving season, and it compares with roughly 8.8 million barrels a day in March of both 2014 and 2015.”

“The gasoline-demand trend could continue, thanks in part to vehicle sales in the U.S. and China that are up 10% to 15% and the renewed preference for cars that burn more fuel, Citigroup Inc. said in a recent note.”

Me:  Strong gasoline demand with continued growth in total energy stocks probably indicates a trading range market ahead with crude trading $35 to $42… The options market says maybe not as recent lower price move (from $42 to $38) has increased implied volatility by 6 points to 46% in the front month… Implied vol has ranged from around 40 to 80 in the past couple of months…

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Chart Book, EIA

by Jim Colburn • Wednesday, March 30, 2016

Charts from This Week in Petroleum illustrate why some traders don’t think we’ll see crude prices much above the low to mid 40’s yet… Crude stocks continue to rise:


To relate stock levels to demand, we look at days supply… For crude, the picture might be getting worse at a decelerating rate (is that the best we can say for crude?), that is, perhaps we are entering a stabilization phase thanks to an increasing demand/decreasing supply picture:


Bottom pickers, however, might point to gasoline which is showing sharp seasonal declines… although still well above the 5 year high:



Days supply for gasoline is already at last year’s levels:




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Bond prices, oil and gas producers… WSJ

by Jim Colburn • Wednesday, March 30, 2016

Here is a nice chart showing average bond prices of energy producers:



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Opec oil output survey, March… Reuters

by Jim Colburn • Wednesday, March 30, 2016

Here are some highlights from the Reuters OPEC oil output survey:  http://www.reuters.com/article/opec-oil-survey-idUSL5N1722LR

Output increased by 100,000 bpd:

“Supply from the Organization of the Petroleum Exporting Countries has risen in March to 32.47 million bpd from 32.37 million bpd in February, according to the survey, based on shipping data and information from sources at oil companies, OPEC and consultants.”

Many have Iran increasing by 500,000 later in the year:

“Iran has increased output by 230,000 bpd since December, according to Reuters surveys. Iranian officials say the increase in supplies is much larger.”

“Iraq, OPEC’s largest source of supply growth in 2015, managed to raise output. An increase in southern exports to what may be a new record in March offset disruption to flows along a pipeline carrying oil from the Kurdish region.”

Saudi output was around unchanged:

“Saudi Arabia kept output steady compared with February, sources in the survey said, citing stable to slightly lower exports in March. Saudi production was assessed at 10.18 million bpd versus 10.20 million in February.”



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Creative Storage, Power…

by Jim Colburn • Tuesday, March 29, 2016

Similar to “storing” power by pumping water back up into the reservoir at night when power prices are cheapest, a company in Nevada is working toward using solar and wind, when available, to move train cars/generators up an incline to be rolled down hill as needed…  Here is the story: http://www.businessgreen.com/bg/news/2452603/could-uphill-train-tracks-solve-the-problem-of-energy-storage

“The project is intended to support Nevada’s expanding renewable energy sector. The company explained how a single railroad track sited on a gentle grade will feature multiple electric locomotive cars that can move up the track as they receive excess power from solar and wind power plants during sunny and windy days.

The train cars can then be dispatched slowly downhill during periods of peak power demand, using their motor-generators to return power to the electricity grid. ARES Nevada will provide a wide range of ancillary services, enabling the grid to adjust to momentary changes in demand and help stabilize grid voltage and frequency, the company said.”

I’m looking forward to a brisk, active market in spread options on electricity someday…


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25iq on Michael Burry…

by Jim Colburn • Tuesday, March 29, 2016

“A Dozen Things I’ve Learned From Dr. Michael Burry About Investing”, by 25iq… Michael Burry was one of the investors highlighted in Michael Lewis’s “The Big Short” (played by Christian Bale in the movie…):


25iq says this about Burry:

“Even as rational as Burry is, it took courage to make and to hold on to the investments that made him famous. Being right, but too early, is indistinguishable from being wrong.”


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HGL production still growing… EIA

by Jim Colburn • Tuesday, March 29, 2016

U.S. production of hydrocarbon gas liquids are expected to continue growing through 2017, according to the EIA:


All of these HGL’s are now net exported:

“The United States, which was a net importer of all HGL products in 2007, became a net exporter of natural gasoline in 2008, of butane and propane in 2011, and of ethane in 2014. Annual average net propane exports (gross exports minus gross imports) increased from 10,000 b/d in 2011 to an estimated 500,000 b/d in 2015, as the capacity to export liquefied petroleum gas (LPG), including propane and butanes, increased by almost 1 million b/d.”

Here is the link:  http://www.eia.gov/todayinenergy/detail.cfm?id=25572


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US Producers: Ready…Set…Sell

by Andrew Lebow • Monday, March 28, 2016

In an excellent article, Energy Intelligence concludes that US shale oil is is “not likely to be the main driver of any natural rebalancing. ” The authors of the piece http://www.energyintel.com/pages/worldopinionarticle.aspx?DocID=919620 argue among other factors the overhang of DUCs (drilled but uncompleted wells) as well cost rationalizations would lead producers to seek a level of 40 to 50 dollars to increase hedging activity as well as begin to work off DUC inventory. Hedging picks up even more between 50 and 60 dollars working off more DUCs and increasing domestic output. Even with prices around 40 dollars they argue US production may not decrease as much as is forecast by the EIA (760,000 b/d) this year relative to last year. We liked the table they provided to summarize price and the resulting hedging/production action producers may take.

Screen Shot 2016-03-28 at 2.33.30 PM

In all likelihood hedging activity has indeed picked up as WTI futures have rallied. While its impossible to really know, two indicators are fairly useful guidelines -the CFTC commitment of Traders report as well as open interest. Just for convenience sake we took a look at the open interest in the December 2016 and the December 2017 WTI contract as proxy contracts for 2016 and 2017 hedging activity.. Not surprisingly open interest has increased markedly in both December contracts over the past two months.  Since the December 2016 and December 2017  mid-January lows of 34.06 and 37.73 respectively ,the two contracts have seen open interest rise to date by around 13,000 contracts for December 2016 and 20,000 contracts for the December 2017 contract   The price rally incidentally would take December 2016 to a 45.06 and December 2017 to a 47.22 high on March 22.    The rising open interest may by itself mean nothing, but the Commitment of Traders data shows that during the sharp two month price rally period,producer gross shorts rose by around 40,000 contracts while net shorts similarly rose around 40,000 contracts. No real proof of producer selling at higher numbers, but perhaps some compelling evidence nevertheless.

Its probably too premature for some of the DUC inventory to be activated ,but it certainly is worth noting that volumes and open interest in the mid 40 dollar level to upper 40 dollar level most probably attracted short commercial interest. How much and how soon some of this short interest will lead to arresting supply losses in the form of new production would be purely a guess.  But the betting here is that the 8.21 mbd  2016 trough number for US production projected by the EIA  is probably much too an aggressive target.

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