A barrage of inventory builds have been reported since the virus brought demand to a halt in mid-March of 2020. In April alone (from week-ending 3/27/2020 through week ending 4/24/2020), the EIA reported an increase of almost 50 million barrels of crude oil injected into US storage fields. Prices were decimated as a result, as were location and time spreads. However, last week the market seemed to have found some footing as both location and calendar spreads recovered significantly off of their lows.
What has changed? Did this create an incentive for market participants to creatively unlock more 'space' to store barrels and if so, what impact will this have on future prices?
Examples of 'found' storage capacity include:
The US federal government agreed to lease up to 23 million barrels of storage space from the Strategic Petroleum Reserve to oil companies since Congress denied an outright purchase of oil by the US government into the SPR.
Keyera Wildhorse Terminal: Wildhorse is a crude oil storage and blending terminal currently under development in Cushing, Oklahoma. The Terminal will include 12 above ground tanks with 4.5 million barrels of working storage capacity. Construction began in 2018 with an estimated completion date of Mid-2020.
Reuters reported that "Enterprise Products Partners LP said it will give oil companies hunting for places to store crude the chance to ship barrels on its Seaway pipeline from the Gulf Coast to Cushing, Oklahoma, the main U.S. storage hub." It plans to charge spot shippers $3 a barrel for the service, effective May 1, according to the filing.
Besides storage capacity, the most unpredictable elephants in the room are:
The size and timing of voluntary & forced production shut-ins, and
Return of demand
Regardless of which of the above was the the driver, this past week delivered some mean reversion in Crude Oil location spreads. Oil Prices along the US Gulf Coast (USGC) had moved below those at Cushing, OK, which provided incentive to producers (south of Cushing, OK) to send crude north (to the Cushing hub) for storage. Weak demand from refiners along the USGC have kept those barrels at Cushing.
The two futures spreads that highlight this dynamic are Midland vs WTI and LLS vs WTI.
Both of these spreads strengthened significantly last week and regained their premiums to WTI at Cushing. If we are honest for a moment, it would be ridiculous for USGC grades to return to their pre-virus premiums to WTI at Cushing unless either global demand was pulling them away from Cushing, or Cushing was rejecting barrels. The later is possible if barrels are headed towards leased SPR storage space which is located across the USGC, not Cushing.
This is a likely scenario, and one that is merely about lowest cost shipping. We say this because via the WTI/Brent spread futures shown below, there is no indication of a 'pull' of barrels away from the USGC. In fact, WTI/Brent futures spreads narrowed in the face of increased tanker rates (which have been running larger than the spread itself implying there is no 'arb').
While location spreads appeared to return to 'pre-virus' levels last week, the same can not be said for time spread relationships. While we did see calendar spreads across the board gain strength last week, they are still decidedly weak. This was frustrating in a lot of ways, since the trajectory towards reaching max capacity in storage by June still appears intact.
We believe calendar spreads were partially buoyed by the expiration of the June Brent contract on Thursday - which delivered a decidedly less dramatic expiration than that seen in WTI for May. One reason for this could be attributed to the nature of the Brent futures contract itself. Brent futures are cash settled against the value of the Brent index price while the WTI contract is physically settled and requires making or taking delivery at expiration.
Instead of collapsing at expiration, June Brent rallied 'relative' to future contracts.
This had quite a stabilizing effect on WTI calendar spreads, as they remained relentlessly bid off their lows all week.
Another contributing factor is the impact of market forces (margin rates and ETF holdings) on open interest in June WTI. In fact, the June WTI contract is well on it's way to becoming one of the least held positions on the board, already behind July and December.
Turning to US product markets though, the May contract for both RB and HO expired on 4/30/2020. Following the pattern seen in the May WTI futures expiration of a few weeks ago, May products went off the board weak, in fact on their lows, as see via the May/June calendar spreads (dark blue line on both charts below).
Gasoline spreads actually moved on to post a larger recovery than distillate spreads. This was partially due to the draw seen in weekly gasoline inventories (see Inventory Recap section).
Look at the rebound in RB vs HO spreads (in US$/Barrel) below!
Given that most U.S. refineries require intermediate and heavy crude oil that must be imported, and that few U.S. grades of oil can be used to produce diesel without blending them with imported oil, this move in RB vs HO seems overdone. US grades of oil are simply too light to contain the organic compounds need to make diesel. Additionally, diesel cannot be produced without first producing gasoline. Diesel is powering this stay-at-home economy with diesel-fueled semi-trucks moving goods across the country for home delivery. Unless we see some huge stats regarding gasoline demand in the upcoming weeks, we expect the RB/HO spread to once again collapse.
One final thing to watch is the net open interest of money managers in WTI. There was quite a significant increase in net length relative to falling outright prices.
Given the recent market frenzy regarding diminishing storage for crude oil, there are developments in the storage arena that the market was desperate to hang its hat on, a welcome respite in a sea of negativity. This is not a sustainable rally absent concrete evidence of demand or reductions in production.
Note for next week:
The Texas Railroad Commission was scheduled to vote on mandatory production cuts this month. Instead, it delayed the vote until May 5, likely in hopes that the situation would somehow resolve itself. The North Dakota Department of Mineral Resources is also set to discuss whether producing low at current prices is not a waste of resources, suggesting that they may be preparing for mandatory cuts, too.
Inventory Recap
US inventory levels by PADD vs total storage capacity by PADD:
Weekly Stats
The EIA reported another total inventory BUILD of 11.60 million barrels for the week ending April 24, 2020. The gasoline draw came mainly from the east and west coasts which combined were 3.40 out of the 3.60 draw for the week.
Year-to-date, this bring us to a Total Inventory BUILD of a record 108.60 million barrels! This surpasses all previous year to date builds in total, however the crude oil build alone (ex SPR) is still less than the 2015 ytd build by 13 million barrels.
Inventory levels are shown below, compared to prior year levels for the same week ending as well as against total storage capacity. The record-breaker continues to be gasoline inventory levels, even with the slight draw this week.
Lee Taylor - Technical Levels
BRENT
Resistance: 27.88 / 30.67 / 33.20
Support: 20.10 / 23.82 / 25.09
We turn our attention to July Brent after expiration. July Brent will need to break above the 27.88 level to create any bit of hope for the longs. We should really focus on the downside support levels of 25.09 to 23.82. Look for a rough week on equities as well to add pressure to the energy markets. July/August will trade between -1.56 to -2.12 for most of this week with the pressure on flat price
WTI
Resistance: 19.77 / 21.34 / 24.84
Support: 16.64 / 13.35 / 10.26
It appears as though, once the USO Fund and the GSCI have readjusted their positions, the markets have either stabilized a bit or returned to focus on supply and demand. Nevertheless, the focus shined on June and July WTI as it bounced off an unthinkable $6.50. We did not change our technical levels for June as they performed well last week and still hold their weight. 19.77 is still major resistance for June WTI – until the market can settle above it then the sentiment will remain bearish. Look for June/July to retest the -2.80 to -3.08 area – if it breaks the spot spread will retest -4.83.
RBOB
Resistance: .7628 / .7935 / .8347
Support: .7127 / .6723 / .6519
The focus on June RBOB will have to be on two major levels. First, .8347, as Thursday’s rally fell short there and has been a major stumbling block for all of April. Before we can look back to .8347 – please keep an eye this week on .7628, which is the weekly resistance level. Look for the spot spread to be range bound between -226 down to -383.
HEATING OIL
Resistance: .8371 / .8674 / .9144
Support: .7800 / .7522 / .6724
June Heating Oil rebounded off last week’s sell-off but has an enormous task of rebuilding any momentum, strength or confidence. Focus on the downside as it can have intraday rallies; however, the technical levels are so distant that one cannot get overly excited about it. We discussed the -514 level in June/July – would expect more shorts after it breaks under this area.