Drawdowns Support the Oil Rally

By Sheraz Mian

The better-than-expected report from the Energy Information Administration (EIA) and the expected outcome of the OPEC meeting in Vienna are helping crude oil sustain its recent price momentum. However, given the commodity’s impressive recent gains, we would view pullbacks in the coming days as healthy for the rally’s long-term sustainability.

In terms of investments, we continue to advocate early-cycle leverage through oilfield service names, such as Weatherford (WFT) and Ensco (ESV). Our long-term favorites remain Exxon (XOM), Schlumberger (SLB) and Diamond Offshore (DO).

In its weekly status report today, the EIA reported a greater-than-expected drawdown in crude oil inventories. The agency reported a drawdown of 5.4 million barrels from the preceding week. A major contributing factor to the heavy inventory drawdown was a greater-than-expected increase in refinery utilization to 85.1% from 82.3% in the preceding week.

Current crude oil stocks are 16.5% above the year-earlier level and remain above the upper limit of the average for this time of the year, as is shown in the chart below from the EIA. The supply cover dropped from the previous week to 25 days of supply, through it remains significantly above the year-earlier level of 20.7 days.



The drawdown in gasoline inventories was less than expected at 0.6 million barrels. However, current gasoline inventories, at 203.5 million barrels, are below year-earlier levels and remain below the lower-end of historical range, as shown in the next chart from the EIA. This is expected to help support further gains in gasoline prices in the coming days.



Offsetting gasoline’s tight supply fundamentals will be continued weak demand and increasing refinery utilization. The demand picture also remains very weak. Total refined products supplied over the last four-week period, a proxy for overall petroleum demand, was down 7.3% from the year-earlier period, with gasoline down 0.4%, distillates (includes diesel) down 9.9% and jet fuel down 9.1%.

Comments

[HerrHansa:]

When I was in Houston in December, the refineries were reporting about 75% utilization. This was not due to the hurricane, since the only damage was to roads near the refineries. Indeed, this market is constantly manipulated. Take all statements and figures with a grain of sail (or should that be bitumen).

May 29 02:18 AM

[john s. gordon:]

'take all statements & figures with a grain of vacuum-tower bottoms'.
> jack

May 29 08:44 AM

[erniem:]

Crap. more expensive gasoline.

May 29 10:33 AM

[toobad41:]

The answer to the question as to where all the excess inventory came from....remember several months ago when the oil prices were going through the roof and everybody that could drill a well did. Well that is where the excess inventory came from. So demand dropped and supply rose. Enough said. So what do you think will happen in another 6 months or so when supplies are down and demand is back up. Better pad your wallet.

May 29 12:27 PM