Olivier Jakob at Petromatrix makes a good point on Friday regarding the recent flattening of the contango and fall in crude prices (our emphasis):
Crude oil prices have been dropping like a rock for the last two days but this will do nothing to improve physical demand for it as the product cracks have not improved and the contango not widened either. Crude can either be refined or put into storage but for now none of these options translate into a printed profit and that should slow down some of the marginal demand for crude oil. Better demand for oil products need to quickly emerge otherwise crude oil will be pushed backs towards OPEC to force it to make further supply cuts.
Meanwhile, JBC Energy note on the same day that:
Looking at the price data on the left and upper section of our report clearly suggests that the driving season has come to an end, with the 5.4-million-b/d US stockbuild sounding the death knell for gasoline margins. Four price indications support this: 1) the European forward market is now in contango at the front-end while the 1st/12th month spread reached a 5-month high; 2) European jet prices have surpassed gasoline; 3) ULSD has surpassed gasoline in the US; and 4) US refinery margins have lost their pole-position. With middle distillates stocks being at such high levels that the entire winter is unlikely to eat up the surplus, we wonder whether US refiners shouldn’t hope for a warm winter, which would boost driving activity to some extent, supporting gasoline margins, which is where US refiners have the competitive edge.
So, what they’re saying is that a flat curve structure is hardly supportive for crude prices because it won’t incentivise the buying of oil for the purpose of storing it, nor will it encourage sales into the spot market either.
The only potential uplift to that scenario might come in the shape of increased product demand, but because of the stock overhang that exists, even a flattening crude curve is unlikely to encourage an increase in refinery runs — how much crude they process into product — the way it would do normally.
On top of that, refiners have to contend with the end of the US driving season, which has, until now, been the main force underpinning the market via gasoline demand. Not only is that force now leaving the market, but add any chance of a cold winter into the fray, that might disappear even more severely than expected.
A cold winter could also encourage the sort of extreme flip into backwardation that would make distillate stocks currently held offshore, cost-effective enough to bring onshore — thus flooding the market with all that stock. A mild winter, ironically in that case, would be supportive to distillate prices by encouraging more onshore production, while those stocks were left offshore.
In short, all hopes for the crude bulls probably lie with a warm winter.
Yet as Stephen Schork of the energy newsletter the Schork Report noted on Friday:
We understand there is a growing consensus in the weather geek community that odds are shortening that this winter could be the coldest yet of the decade; even colder than the 2002/03 winter, which if you recall, slammed the East, but for the most part, spared the Midwest. More importantly, some forecasts for this winter have the cold extending from the East out through Chicago, the largest residential gas market in the U.S.
And there’s already been snow in Denver.
Related links:
Nothing bullish in crude – FT Alphaville
A natgas storm in a tea-cup - FT Alphaville
National Weather Service