Oil Drawn Down but Product Stockpiles Grow

By Brad Zigler

Real-time Monetary Inflation (per annum): 8.5%

Profit-taking in the New York Mercantile Exchange's August crude oil contract led to a lower close Tuesday, but the overnight session turned higher and maintained a bullish undertone all the way up to the ringing of the day session bell and the release of the weekly U.S. Energy Department inventory report.

This week, crude oil was 65 cents, or 0.9%, higher in anticipation of the inventory data. Preliminary figures from the American Petroleum Institute [API] indicated that a 6.8-million-barrel drawdown in crude stockpiles might be reported, while buildups in product inventories were likely heading into the Independence Day holiday weekend.

Oil Patch analysts, meanwhile, were calling for a less aggressive 2.1-million-barrel off-take in crude oil supplies.

Gasoline stocks were pegged 1.9 million barrels higher, and distillate stocks, including diesel and heating oil, were seen rising 1.6 million barrels. Refinery usage was forecast to tick up 0.2% to 87.3%.

The figures released by the U.S. Energy Information Administration [EIA], however, showed a drawdown of 3.7 million barrels in the crude stockpile. Still, at 350.2 million barrels, supplies remain above seasonal averages.

Additionally, the agency reported refineries operating at 87.0% of capacity, turning out an average 9.2 million barrels of gasoline and 4.2 million barrels of distillate fuels daily. Output for both fuel classes increased over the previous week's levels.

Increased production turned into higher-than-expected product inventories. EIA reported a 2.3-million-barrel build in gasoline stocks and an even more aggressive 2.9-millionbarrel increase in distillate fuel supplies.

Motor gasoline demand is up by 0.9% from the same period last year, according to government figures, while distillate fuel demand is off 9.4% from year-ago levels.

NYMEX-Implied Refining Margins

Gasoline futures rose 1 cent a gallon, or 0.6%, this week as heating oil fell 2 cents a gallon, or 1%. Overall crack spreads fell 63 cents a barrel, dropping refining margins 1 percentage point to 12.8%. The four-year average margin implied by NYMEX futures is 18.2%.

At $9.80 a barrel, the gasoline crack still edges out heating oil's $7.28-per-barrel spread.

NYMEX Product Cracks

This week, the quarterly contango nudged up a dime a barrel to an average $2.23, reflecting the seasonally average supply situation.

Technically, August crude oil is rebounding from support at the $67.30 level. A downside breach could set bears' minds on a test of defenses at $62.26. Meanwhile, overhead resistance at the June 11 intraday high of $73.90 is the market's next bullish challenge.