What to Watch: Iraq, OPEC and Stocks, Stocks, Stocks

Notes:

When keeping an eye on petroleum prices, we watch inventories closely. Recall that inventories measure the balance between supply and demand, and thus signal pressure on stocks.

For crude oil, world petroleum inventories are low, and Iraq is probably the largest wild card that could impact prices in the short term. While OPEC will continue to adjust production to support the price of crude oil, the world economy may work against the organization. A slower economy means lower demand, and more OPEC production cutbacks to support prices.

We are almost through this winter, so for distillate and propane, we will be watching how low stocks are at the end of the winter, which will indicate how much extra build is needed to start next winter in good shape. Crude oil prices impact both distillate and propane prices, but the high natural gas prices have had some unusual impacts this year on propane supply. We will be watching the impact of natural gas prices on the propane build this coming summer and fall.

Now is the time to begin watching gasoline more closely. Stocks are being drawn down as refineries undergo maintenance, but will build back up through May to be used during the summer. We watch the May inventory levels to measure how “tight” our summer is likely to be. Right now, lower than normal stock levels do not bode well, but large margins could draw unusual imports, as we saw with distillate.

Finally, given the very low current storage levels, natural gas suppliers may have to struggle to build inventories back before winter to more normal levels. It will be important to watch where inventories finally bottom out and the subsequent build rates. Temperatures this summer will influence demand for natural gas. If demand is low, the build rate could be higher than usual.