By Keith Reid
So far, this winter is turning into a dud. Though at late-season save is not out of the question. On the plus side for the deliverable fuels industry, oil prices and propane prices are low and are likely to stay that way. But, the same can be said for natural gas, only with a little more uncertainty about future stability.
Fuel Oil News interviewed experts for their perspective on what to expect in the coming months. We were assisted once again by Alan Levine and Brian Milne. We also had feedback from Sprague and various sources at AMERIgreen.
Levine is the CEO and chairman of Powershouse, a group of seasoned energy experts and broker professionals working in partnership to meet the business goals of its customers. He is an internationally recognized expert in pricing and business practices in the energy industry. A petroleum specialist for over 40 years, Levine is a highly regarded authority on the relationship of energy futures to cash petroleum markets.
Milne the editor of Schneider Electric’s MarketWire—a real-time market and news service focused on U.S. oil product markets and relevant news and analysis, and also the editor of OilSpot—a weekly newsletter on the oil markets.
Sprague responded by email with company perspectives on the areas covered. Sprague is one of the largest independent suppliers of energy and materials handling services in the Northeast with products including home heating oil, diesel fuels, residual fuels, gasoline and natural gas. Over the years, Sprague has aggressively expanded its offerings to meet the ever-changing energy and logistics markets.
Various AMERIgreen analysts also responded by email to the specific areas covered. AMERIgreen is an energy wholesaler in the Mid-Atlantic and New England markets. It provides domestically-produced biofuels, refined fuels, propane, lubricants, hedging and marketing services to its customers.
As should be noted, none of the projections outlined here are set in stone and individual purchasing and hedging decision should use this as simply a starting point and not the ending point in the decision-making process. Sprague submitted the following disclaimer that fully applies to all comments made in this article by all parties:
These responses are provided for informational purposes only and are not intended as advice on any transaction nor is it a solicitation to buy or sell commodities. Sprague makes no representations or warranties with respect to the contents of such information, including, without limitation, its accuracy and completeness, and Sprague shall not be responsible for the consequence of reliance upon any opinions, statements, projections and analyses presented herein or for any omission or error in fact.
Note: These interviews were conducted in late December and are invariably, and unavoidably, somewhat dated by the time they arrive in print.
Crude oil is a critical metric as it forms the bulk, base price of refined products. The fracking revolution and commodities market reforms are still keeping prices down combined with a continued aggressive Saudi oil policy. The impact is enormous. There is currently a tremendous oversupply of crude—both in storage and from production– and that seems unlikely to change any time soon.
Milne noted that US crude production was at 9.2 million barrels per day at the end of 2015. “That’s a high number,” he said. “It’s down from the 9.6 million barrels in April, but that is still significant.”
“Crude oil remains range bound, $27.00 – $32.00, and anticipate it trading in that range more likely through the 2015-2016 heating season,” said Ron Flick, AMERIgreen’s wholesale petroleum manager. Fourth quarter could see a breakout to $40 to $50 range. If we had to pick a number it would be in the $25.00* range, despite Wall Street’s call for crude to trade in the $10’s. As always, geopolitical and/or boost to the global economy would have an impact to the upside.”
A bottom, both spike-related and sustained, is a major topic of conversation in analyst circles.
“I’ve heard a lot of talk that oil is get a break below $30 and I’ve even heard some talk of crude getting down as low as $18,” Milne said. “We’ll see if that happened. But if you look at your charts, well there you are.”
Milne (in line with our other interviewees) noted that you do not have the traditional supports that used to be in place. OPEC is not acting like a cartel, which would have meant a cut in production to support a higher price. The price war is ongoing, and the Saudis and Iranians are not cooperative in most areas so there is little likelihood of an agreement to prop up prices and in fact the likelihood of even greater price competition.
On the upside, Levine noted that would be hard to imagine crude anywhere over $50 per barrel.
“It’s the resiliency of American production that’s making all the difference,” Levine said. “The Saudi’s had this bright idea that will really produce this stuff and those American shale producers will all go out of business. But, they aren’t. Here’s crude oil production in the United States still over 9 million barrels per day, what’s going on? The answer is the banks are saying prices are very low right now but they can’t stay that way forever, so they continue to provide risk capital for producers which is a new thing.”
One traditional factor that impacts higher oil prices is, of course, conflict in the Middle East. However, under our new energy reality fairly serious events that would previously have spiked oil prices tens of dollars for extended periods of time today barely create a blip in the markets. There is one recent development –the execution of Saudi Arabia’s top Shia cleric, Sheikh Nimr al-Nimr— that could tip the scales. Saudi Arabia is Sunni dominated and Iran is Shia dominated.
“Saudi Arabia has a new king, fairly young man, and like everybody else that’s new he has to make his mark,” Levine said. “They entered into a war in Yemen that didn’t go very well and now they executed Nimr al-Nimr, which was very provocative and it had to be known that it was going to be provocative. We’ll have to see if this becomes a shooting war. I hope it doesn’t.”
So far, the immediate reaction from Iran while aggressive in tone has been subdued in action. There’s no guarantee that that will continue. However, the news is still dominated by talk of $10 per barrel oil and not $200 per barrel oil, which certainly wouldn’t have been the case just a few years previously.
While the Saudi Arabia/Iran issue presents an uncertainty that might lead to higher prices, the current and troubling economic news coming out of China opens the possibility of a negative price impact. Of course, should China rapidly become the next Lehman Brothers event, the benefits from a drop in oil prices will be a slight comfort in the face of a global economic collapse.
Also regarding Iran, the Obama Administrations deal will likely see the sanctions are fully lifted in the immediate future, and Iranian oil supply will begin to flood the markets.
A variety of traditional factors will likely cause some shifts in price as the year progresses.
Sprague offered the following note on one potential rally driver. On the “rebound” side of things, there is some thought that the large number of speculative short positions in crude oil could lead to an eventual rally in prices. It is certainly a recognized phenomenon that market prices tend to go too far in one direction before moderating.
Levine noted that the United States is preparing to sell some of its strategic petroleum reserves to underwrite some of the costs associated with the current Highway bill, which will dump more oil on the markets.
The lifting of the crude export ban was likely seen as being a down-the-road impact by Levine, given the current market dynamics and the spool up time to get product moving.
As with crude, distillates have abundant supply and production.
Sprague offered the following: Sprague As cheap as product has been recently, crude oil has been even cheaper. This dynamic has provided refiners with excellent refining margins which has led to a refined product over-supply situation. Heating oil is no exception. In all sulfur grades, heating oil is readily available in the spot markets and the contango (carry) market structure encourages its continued storage. On the heels of the warmest December in recorded history, it is unlikely that the heating oil over-supply situation will correct in the near term.
“Diesel demand growth has been limited because of slowing industrial output—manufacturing in the United States slowed in December — and we’ve seen distillate fuel supplies climb to four-year highs now,” Milne said. “From an inventory perspective distillates have been bearish, frankly, since 2014. We also had overproduction during the summer where they were cranking out a lot a gasoline but also a lot of distillate in the process.”
Milne noted that while United States exports diesel there hasn’t been a big jump in that number and that is as trended relatively the same for the past few years. He also noted that there’s a fair degree of competition for distillates. “It’s over 1 million barrels, which isn’t bad, but if you’re trying to figure out how organ to drain down the extra supply there’s not a lot of spots to go,” he said. ”The heating oil contract, now more commonly the ULSD contract, fell to an 11.5 year low so it’s can be tough to get this off the mat.”
Levine noted that in addition to the weather issue, there is competition from foreign refiners that has rarely been the case in the past. India in particular has had to find new demand for its products since Chinese demand has dropped. That distillate is now going into Latin America and Europe replacing U.S. product.
As already touched on, the mild winter has obviously had a significant impact on the price of not only heating oil but all heating fuels. While the winter is not over yet, February would have to be brutal and continue into March for there to be a win, or even a draw this year. But, things are not as grim as they would have been several years ago.
“No winter through December! Degree days lag behind by nearly 30%. However, most distributors remain upbeat having experienced two cold winters (2014/2015), the lowest prices seen in years and the ability to maintain good margin as they fight their way through this heating season,” said Flick.
This is also the prime hedging window for next season. What are the dynamics saying for those considerations?
“I think this season is in trouble,” said Levine. “Because we have such a high carry into next winter, it’s much too early in my view to be buying next winter. As a result on counseling my customers to wait until probably May or June before they consider looking at next season, which is not what I would ordinarily be doing. I would normally be telling them to buy right now.”
Sprague offered the following hedging advice: The extended price decline of recent months only underscores the importance of thoughtful and balanced hedging strategies. Going into the summer, relatively low forward heating oil prices gave few retailers the urgency to consider downside protection. While further price decline seemed like a long-shot at the time, recent months have proven once again that there is no predicting what markets may do. Once again, the best strategy for retailer is to as closely match what is being bought to what is being sold. Selling retail cap programs with corresponding downside protection reduces risk.
The propane outlook offers more of the same into the immediate future.
“This is another commodity where inventories are through the roof, Levine said. “From a technical point of view we have been at the $0.37 to $0.38 range basis spot futures for several weeks and since were out of crop drying season so I think the demand situation is less than attractive for propane and I would not be surprised to see spot propane move as low as $0.30.
Looking a bit down the road, propane supply dynamics in the domestic market are less certain.
“The propane market continues to exist in an oversupplied position in the United States. However, most of the excess is sitting in the Gulf waiting on export opportunity,” said Bob Troop, AMERIgreen’s director of propane. “With the startup of the new Panama Canal, it is expected to reduce transportation to the Far East. Thus the surplus could find itself under pressure from potential exports.
“Here in the U.S., gas directed drilling activity has declined to less than half of what it was last year. There is concern about reduced production of propane, as natural gas wells are the source of most of the new production.
“As long as we continue to see inventories remain above their five-year averages, propane should maintain its relative low cost. Oil prices, demand and export activities could of course rapidly change this forecast.”
Where natural gas is concerned, there is generally more of the same.
“Natural Gas, storage inventories are at record levels going into the heating season, well above the 5 year average,” said Bob Reicher, AMERIgreen director of natural gas. “With a warm December, inventories remain high. The NYMEX NG contracts have also been soft in comparison to previous years. The futures contracts for the next 12 months are averaging $2.444 with a low of $2.22 for Feb 2016 and a high of $2.812 for Jan 2017. If we have normal temperatures for the remainder of this winter, we should come out of the winter with above average levels of gas in storage. We should see prices staying in this current trading range plus or minus 20% barring any unusual variations in demand.”
Levine is a bit more bullish on natural gas than most of the other fuels discussed.
“Natural gas seems to be somewhat different,” said Levine. Technically you can see the possibility of a bottom being formed. Our natural gas business is good and guys are coming in and buying this stuff at these prices. I would guess that we probably have a bottom in the market and I would look for some degree of strength to reemerge as we move toward March and spring.”
Levine noted that natural gas producers are benefiting from the same financial institution optimism that is currently helping support investment in the oil shale plays.
Gasoline also has a few bullish trends.
“Gasoline is also a bit different,” Levine said. “Demand is looking good and prices are low, so we might see some rise in prices as we go into the spring turnaround. Nothing massive, but I do think enough that being a buyer of the crack spread makes sense.”
“Gasoline was the bright spot of 2015,” Milne said. “Crack spreads were good for refiners trying to capture that demand and everything was looking good and then we come out Wednesday with this report from EIA that challenges those beliefs. It suggests a huge drop in demand and a big jump in inventories and we saw gasoline sell down to a seven-year low as a result. So that’s negative.”
Milne does see gasoline being supportive going into 2016. He notes that the auto industry saw record sales in 2015 between low gas prices, low interest rates and what was seen as an improving employment picture. He noted that new data has even come out suggesting that millennial’s might be putting down the game controllers and mobile phones and getting behind the wheel a little bit more than was anticipated.
With biofuels, recent announcements out of Washington set the tone.
Sprague offered the following: With regard to bio fuels, the year-end reinstatement of the blenders tax credit assures that bio-blends are here for the foreseeable future although lower overall energy prices relative to the higher cost of producing bio-fuels makes it unlikely that the role of bio-fuels will grow to any appreciable degree– short of increased retailer demand or state and/or federal mandates requiring larger blend percentages.
On the production side, there are challenges closer to home. “U.S. producers and marketers are all anticipating the competitive threat Argentinian supply represents,” said Steve McCracken, AMERIgreen‘s CEO of distributor energy services. “Market participants peg late Q1/early Q2 timeframe for this product to land in U.S. port terminals. As we are (hopefully) holding onto a strong 2nd half of a winter season, market direction for RIN and net Biodiesel values will emerge. With heating oil suppressed, we’ll likely still see discretionary blend margins but not at steep discount or with widespread availability as in years past.
“Price parity (and favorability) with distillates has seen record adoption growth among blenders, marketers and therefore consumers. While an excellent distillate blendstock, Biodiesel’s real value to the industry is as a catalyst and equipment enhancement additive. In addition to marketers looking for a pricing edge, diesel motors and heating equipment respond exceptionally well to biodiesel blends. With increasing efforts to limit and diminish emissions, consumers can achieve and exceed emissions goals by simply blending Biodiesel. Marketers see a discount on the gallon, users experience steep savings in cost avoidance. No new equipment or modifications or conversions. No fueling infrastructure installation for CNG or LNG.
Biodiesel can and will save a few points on the gallon for blenders and we’ll see favorable net Biodiesel values this year. The long-term market outlook for distillates is much clearer (and positive) as long as Biodiesel remains a part of the equation. For the sake of the deal and the long term stability of the industry let us not be disillusioned by the idea of only saving a few pennies on the gallon and focus also on sustaining the market by committing to increased blends, extending life of diesel and heating equipment, maintaining downstream pull for the benefit of a thriving distillate market.”
While this season’s weather is tough on dealers, and these prices can be tough on traders, the upside for consumers is hard to deny.
“It’s hard to get really enthusiastic about any of these prices—really,” said Levine. “But as a consumer I couldn’t be happier. It leaves money available to purchase other things and from a broader economic point of view low energy prices are very good.”