Commodity trading: Oil, gold rises
Oil prices rose on Wednesday after US oil storage data showed a larger-than-expected drawdown in crude stockpiles, a sign usage is ramping up ahead of the summer driving season, an important time in commodity trading.
Brent crude futures were up 52 cents, or 0.63%, at $83.68 a barrel, while US West Texas Intermediate (WTI) crude futures gained 65 cents, or 0.83%, at $79.03 a barrel.
Commodity trading: Crude oil inventories drop
US crude inventories for the week ended 3 May fell 1.4 million barrels to 459.5 million, slightly more than the 1.1 million-barrel draw seen in a survey of economists by Reuters, the Energy Information Administration said on Wednesday.
In spite of this, the EIA still expects global oil demand to grow more slowly this year.
The strengthening of the US dollar has dampened commodity prices thus far.
Higher oil prices make crude more expensive for traders using other currencies.
Expectations of a ceasefire in Gaza have also helped drive down oil prices lately, with many analysts saying the risk premium on the commodity has fallen.
The famously bearish John Evans at PVM Oil told me that geopolitics seem to be ‘taking a backseat to supply and demand fundamentals’, leaving the market to work through ‘a stubborn level of US inflation and creeping US interest rates, which will influence the cost of money for the oil traders’.
Commodity trading: Energy stocks
Further weighing on the market were concerns that OPEC+ could cut supply ahead of a 1 June policy meeting when it meets.
Even so, the Russian Deputy Prime Minister Alexander Novak reportedly said that there had been no discussion of any OPEC+ increase of oil output.
In the US, demand for gasoline and diesel, the predominant sources of fuel for motor vehicles, has fallen to what has been their weakest seasonal demand in two years, according to the Energy Information Administration (EIA). Both fu the commodity trading sector.
Weekly demand for gasoline was 8.63 million barrels per day (bpd) in the week ending 3 May, the lowest early-May level since the 2020 coronavirus pandemic.
Likewise, demand for distillate fuel – which is diesel and heating oil – averaged 3.60 million bpd in the past month, the lowest seasonal level for that period since 2020.
The reasons, analysts say, may be tied to economic stagnation, or to renewable fuels displacing fossil fuels.
Mizuho analyst Robert Yawger pointed out that the disappointing reading on gasoline demand ‘may also represent the tip of the iceberg with regards to broader economic challenges, which would be a worry for [commodity trading and refining]
The tepid demand has weighed on refining margins, threatening to put a damper on the two years of booming profits.
That was underscored by the US 3-2-1 spread for refining margins breaching $26.50 per barrel on Monday, its lowest since February, and the weakest start-of-May reading since 2021, according to Refinitiv Eikon data.
The US gasoline-crude oil futures spread also narrowed Monday to its lowest since February. The US diesel crack spread, a measure of profitability for converting crude to diesel, dropped to a 12-month low of about $23 per barrel.
Soaring inventories have simply added to the demand slump. Gasoline stocks increased by 915,000 barrels last week to reach 228 million barrels – the highest seasonally for this year.
Distillate fuel oil stocks rose by 560,000 barrels to reach 116.4 million barrels for the week ending May 3 – the highest seasonally in three years.
It has clear implications for commodity traders, for whom volatile demand and rising stock levels could affect how profitable refining has become, and even which markets to trade.
US gas stocks are very high, reflecting the effect of the current El Niño weather regime, which has generated mild winters (for example, 2023/24).
This pushed down the consumption of gas and electricity for home heating.
But with gas prices so low, combustion by power generators has increased. Producers have also responded to the lower prices by cutting drilling still further, ensuring that the excess is likely to disappear by the winter of 2024/25 (this is one of the things that commodity traders look out for).
On 26 April, US gas inventories hit 2,484 billion cubic feet (bcf), the highest for this time of year since 2016.
This level was 666 bcf above the 10-year seasonal average. The mild temperatures associated with El Niño had cut heating demand dramatically.
That hasn’t deterred a surplus.
The market has been balanced, as ultra-low gas prices have motivated the production of as much gas-fired electricity generation as possible, while drilling cutback was being maximised.
When it comes to commodity trading – and gas futures as well – those who think the 2024/25 winter will be warmer than this one tend to buy, while those who believe the 204/25 winter will be cold tend to sell.
Next winter will be colder than this one.
This year’s heating demand and gas consumption were enhanced by weather, which will not repeat next year.
As for drilling cutback, it’s destined to relax.
El Niño conditions have abated and, while a powerful new period is unlikely, the gas price has fallen so low that gas-fired power generation has touched a seasonal record, with the capacity factor of combined-cycle generators reaching nearly 63% in January 2024.
This has seen a corresponding drop in coal use, with capacity falling to 181 million kW by the end of 2023.
A new record volume of gas being burnt by electricity generators: 1,158 bcf in January 2024, a seasonal record, and 166 bcf more than in January 2023.
Exports, of course, help deplete excess stocks too. In February 2024, pipeline and LNG exports together totalled 22 billion cubic feet per day (21% of domestic dry gas production).
The EIA expects exports to rise again, to 23 bcf per day by February 2025 Meanwhile, ultra-low prices have pushed the major gas producers to cut back drilling and production. The number of rigs drilling for gas fell to 108 in April, down from 120 in February.
Higher consumption, more exports and less production all add up to wiping out the surplus and pushing prices higher, before winter 2024/25 is over. This is information that commodity traders will be happy to have.
EIA numbers show that US gasoline and diesel demand reached their weakest seasonal levels since the depth of the coronavirus pandemic last year, as the 4-week average demand for gasoline fell to 8.63 million barrels per day (bpd) on the week ending 3 May (the lowest early-May level since the pandemic began).
This fall-off in refining margins is crimping the commodity trading sector’s profits.
Meanwhile, demand for distillate fuel – diesel and heating oil – averaged 3.60 million bpd over the prior four weeks, the lowest seasonal level since 2020.
Some analysts blame slack demand on a potential economic slowdown, while others suspected that renewable fuels are replacing increasing amounts of fossil fuels.
Mizuho’s analyst Robert Yawger wrote: ‘The poor demand for gasoline suggested a broader economic problem for refiners and commodity traders.’
Diminished demand has put pressure on refining margins, threatening two years of strong profits.
The US 3-2-1 spread, a key indicator of refining margins, fell below $26.50/barrel, a low for this year and the weakest beginning-of-May reading since 2021.
The US gasoline-crude oil futures spread was also at a low for the year, at $10/barrel, while the diesel crack spread dropped to a year-long low of about $23/barrel.
Soaring inventories pile on top of the demand setback. Gasoline stocks, which rose by 915,000 barrels last week to 228 million barrels — its highest seasonal level since 2021 — was joined by distillate fuel oil stocks, which rose by 560,000 barrels for the week ending 3 May to 116.4 million barrels, the highest seasonal level in three years.
These trends will have direct consequences for commodity traders as demand volatility and rising stocks could affect the profitability of refining and changing market strategies.
Guyana’s cabinet has approved a bid for an offshore oil block by a consortium of QatarEnergy, TotalEnergies and Malaysia’s state-owned Petronas, the minister of public works Deodat Indar told Reuters on 10 February.
It appears to be a landmark deal, as Guyana offered 14 offshore blocks last September in its first-ever competitive auction.
Bids were also submitted from an Exxon Mobil-led consortium that produces all the country’s oil to date.
Although the blocks have yet to be formally conceded, the consortium’s bid for shallow water block S-4 is pending, with negotiations for a production sharing agreement (PSA) between the government and Guyana’s energy ministry,
On the other hand, a consortium led by Exxon Mobil, which includes Hess and CNOOC Ltd, is in negotiations over its bid on the shallow water block S-8, reporting to date more than 11 billion barrels of recoverable oil and gas resources, and currently producing around 650,000 barrels of oil a day.
These changes emphasise the country’s role in global commodity trade markets, and in particular the significance of Guyanese oil finds in recent years.
The outcome of negotiating these blocks in offshore waters – and the potential for them to be awarded – could have ripple effects in the global oil market, and the wider commodity trade market.
TC Energy’s decision to carve off its oil pipeline unit as a new corporation, to be called South Bow, is a bid to provide more Canadian crude to US Gulf Coast refiners, but it will face tough competition and carry a huge debt load when it starts up.
Commodity trading will be a critical building block to help it pay down the mountain of debt, and to allow it to shift its business mix more toward natural gas.
South Bow’s entry into the market mirrors the growing number of transportation options for Canada’s crude. South Bow’s competitor Trans Mountain recently completed an expansion of its pipeline capacity that opens new transportation options for crude oil from Alberta to the US West Coast and Asia.
South Bow is also up against Enbridge, another major Canadian player that already has a significant footprint in Texas, with the largest oil storage and export terminal in the US.
Although its strategic advantages in commodity trade make up for the lack of bells and whistles that help other projects win sponsors, South Bow’s appeal is limited.
It will have to depend on third-party marine facilities to export any products beyond what it refines at home, says Hillary Stevenson, a senior director of energy market intelligence at IIR Energy.
Its flagship asset is the Keystone pipeline, which moves 622,000 barrels per day (bpd) of crude from Alberta in Canada, through into Nebraska where it splits into two routes, one west-bound for the Midwest, the other south-bound through Cushing, Oklahoma.
Another pipeline, Marketlink’s, takes 750,000 bpd of crude from Cushing to Texas refineries. Keystone is already 94% pre-booked on long-term contracts, leaving little capacity for sales on the spot market.
The new president of South Bow, Bevin Wirzba, said it would focus on ‘alleviating our debt, financing organic growth and maximising returns to shareholders’.
Referring to the Gulf, he saw ‘great opportunity’. There’s more demand for Marketlink in the Gulf, he said, and a possibility of infrastructure projects with the OPEC countries.
Nonetheless, Stevenson says that the refining capacity in the Gulf is ‘expected to decline by 2% in 2025 due to the closure of the 263,776 bpd LyondellBasell refinery in Houston’.
South Bow aspires to fill that hole by slipping into the business left by dwindling overseas suppliers of medium- and heavy-sour crude.
South Bow, in the view of the senior wealth manager Brianne Gardner, is a good business: an asset play with a solid stream of cash.
Even in the face of rising environmental pressure on the oil and gas industry, Gardner believes that pipelines will retain substantial value through the continued risk premiums built into their financing; traded commodities will keep flowing down the Sierras.
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