Highlights
- Oil stocks low at start of Ukraine conflict
- U.S. fuel processors are reluctant to buy Russian feedstocks
- Alternative sources may not be sufficient
- European natural gas at risk from Russian actions.
The Matrix
The Ukraine headlines are arresting enough. Reports of Russian nuclear forces on alert, imposition on use of EU air space by Russia, refugees fleeing, and similar disquieting news paint a picture of political Eastern Europe in disarray.
The meat and potatoes of the Ukrainian war’s effect on underlying economic activity on the continent and elsewhere tends to get lost in the big picture reporting regularly available. The effect on oil supply, for example, has been well documented but the degree to which it has influenced business activity, less so.
Availability of residual fuel oil in the United States is tight, and prices could remain higher because of the action in Ukraine. Several U.S. sellers, including the majors, have imposed their own version of sanctions on Russian supply. “They won’t touch the stuff,” according to one respected news source. The concern is public relations. A cargo of Russian fuel oil coming into the Gulf of Mexico is food for a major article in the press and a black eye for the importer. The loss of this supply will affect heavy fuel prices and cut availabilities for bunker blending.
Russia exports about 7.5 million barrels of crude oil daily. Sanctions imposed by EU and U.S. governments could have enormous consequences. Alternative sources of supply, particularly Saudi Arabia and the United Arab Emirates are put at three million daily barrels of spare capacity – about three percent of worldwide demand. Of course, availability is more than having the oil, it is also dependent on adequate infrastructure. Shipping, pipelines, tankage, and refinery availability influence actual availability as well.
U.S. refining usage now stands at 87.4 percent of capacity. There is a full slate of facilities repair, maintenance, and upgrading on tap for this spring. Two years of deferred work have to be made up, adding to the concern for supply in 2022.
Supply/Demand Balances
Supply/demand data in the United States for the week ending February 18, 2022 were released by the Energy Information Administration.
Total commercial stocks of petroleum fell 1.8 million barrels during the week ending February 18, 2022.
Commercial crude oil supplies in the United States increased by 4.5 million barrels from the previous report week to 416.0 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Plus 1.1 million barrels to 8.3 million barrels
PADD 2: Down 2.6 million barrels to 103.2 million barrels
PADD 3: Plus 5.0 million barrels to 229.8 million barrels
PADD 4: Plus 0.6 million barrels to 24.2 million barrels
PADD 5: Plus 0.6 million barrels to 50.6 million barrels
Cushing, Oklahoma inventories were down 2.0 million barrels from the previous report week to 23.8 million barrels.
Domestic crude oil production was UNCH from the previous report week at 11.6 million barrels daily.
Crude oil imports averaged 6.828 million barrels per day, a daily increase of 1,038,000 barrels. Exports increased 415,000 barrels daily to 2.686 million barrels per day.
Refineries used 87.4 percent of capacity; 2.9 percentage points higher from the previous report week.
Crude oil inputs to refineries increased 344,000 barrels daily; there were 15.246 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 387,000 barrels daily to 15.847 million barrels daily.
Total petroleum product inventories fell 6.4 million barrels from the previous report week.
Total product demand fell 1,257,000 barrels daily to 21.483 million barrels per day.
Gasoline stocks decreased 0.6 from the previous report week; total stocks are 246.5 million barrels.
Demand for gasoline increased by 87,000 barrels per day to 8.657 million barrels per day.
Distillate fuel oil stocks decreased 0.6 million barrels from the previous report week; distillate stocks are at 119.7 million barrels. EIA reported national distillate demand at 4.233 million barrels per day during the report week, a decrease of 88,000 barrels daily.
Propane stocks decreased 3.9 million barrels from the previous report week; propane stocks are at 38.0 million barrels. The report estimated current demand at 1.880 million barrels per day, a decrease of 187,000 barrels daily from the previous report week.
Natural Gas
The geopolitical power of oil and natural gas markets was brought home with Germany’s unwillingness to certify Nord Stream 2. This natural gas pipeline is complete, but not operating, pending certification by Germany. It will move gas from Russia directly to Germany.
Nord Stream 2, when in service, along with its already operating companion pipe Nord Stream, can supply about one-fourth of the European Union’s total natural gas demand. Stream 2 itself can move 55 Bcf annually – half of Germany’s demand.
This degree of control by Russia over European natural gas supply has long been opposed by the United States.
The possibility of a total cutoff cannot be excluded with Russia’s established history of using natural gas as a political weapon. This has implications for oil as well. Power producers in Europe would be forced to heavy fuel oil as the alternative fuel, placing even greater stress of global oil supplies, supporting the “higher-for-longer” ideas now driving markets.
According to the EIA:
…net [natural gas] withdrawals from storage totaled 129 Bcf for the week ending February 18, compared with the five-year (2017–2021) average net withdrawals of 166 Bcf and last year’s net withdrawals of 324 Bcf during the same week. Working natural gas stocks totaled 1,782 Bcf, which is 214 Bcf lower than the five-year average and 209 Bcf lower than last year at this time.
The average rate of withdrawals from storage is 6% higher than the five-year average so far in the withdrawal season (November through March). If the rate of withdrawals from storage matched the five-year average of 8.1 Bcf/d for the remainder of the withdrawal season, the total inventory would be 1,452 Bcf on March 31, which is 214 Bcf lower than the five-year average of 1,666 Bcf for that time of year.