Summary
Oil and Natural Gas prices have become disconnected in the USA with respect to historical comparisons. Over the years, utilities and others have switched from oil based products to natural gas. In today's price environment, if one has not already switched from oil to gas, one probably can't due to supply or logistics considerations.
Analysis
Distillate inventories in the USA, which includes both diesel fuel and heating oil are at a 26 year high of over 170 million barrels. Not only does the USA have high inventory, there is an estimated 70 million barrels of distillate being stored in oil tankers in various regions of the world, mostly off shore Europe and West Africa.
Over time, utilities in the USA have switched away from high sulfur fuel oil , with its resultant high SOx emissions to cleaner natural gas. Combine that with the current low prices, utilities simply favor natural gas over fuel oil. Industrial use of natural gas has declined with a slowdown in economic activity. Distillate use by utilities is more a function of supplying power during peak generation periods which have been fewer this past summer with milder temperatures in the northeast.
That brings us to the current over supply situation in both commodities. From a trading perspective, it's which commodity looks worse. From a price perspective the answer is natural gas. Cheaper natural gas is replacing oil where ever the alternative exists.
Both commodities need a very cold winter for price action to the upside (Improved economic activity wouldn't hurt either). As the article points out, for distillate there is just too large an oversupply to worry about a supply shortage. What the article also does not point out, is that in order to prevent the USA from absolutely drowning in distillate, the USA has been exporting 600,000 barrels per day representing 15% of domestic refinery production. A cold winter will encourage refineries, through higher margins to increase crude rates with a corresponding increasing in distillate production.
The question of whether distillate inventories will have an effect on natgas should be reversed. Can natural gas demand and prices recover to the point that industry switches back to oil?
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
