Were Oil Traders Too Bullish?

By Brad Zigler

Real-time Monetary Inflation (per annum): 4.4%*

Crude oil started out higher overnight Tuesday as the market tried to extend a rally that pushed the nearby NYMEX West Texas Intermediate [WTI] contract up three-quarters of a dollar on Tuesday. September futures stalled at the $65 level and broke below $64 ahead of the release by the U.S. Energy Information Administration [EIA] of its weekly oil inventory report.

Analysts were expecting a drawdown in oil stocks of 1.2 million to 2.1 million barrels to be reported by the energy agency. Traders, though, kept their eyes on a contradictory estimate from the industry-supported American Petroleum Institute [API] that pointed to a 3.1-million-barrel build.

In the end, Street estimates were closer to the mark. This morning's EIA report showed crude supplies decreasing by 1.8 million barrels. At 342.7 million barrels, though, inventories still remain above seasonal norms.

Gasoline stocks, which had been forecast by Oil Patch observers to increase by 650,000 to 700,000 barrels, actually rose by 800,000, according to EIA. API had predicted a 1.3-million-barrel build.

Distillate fuel stocks, including heating oil and diesel, increased by 1.2 million barrels, slightly less than analysts' expectations. API came in with a guesstimate of a 147,000-barrel increase.

API's call for a decline in refinery utilization to 84% of operable capacity was more accurate than the Street consensus, though. Analysts expected a slight decline to 87.3% but usage, in fact, sunk to 85.8%.

EIA also reported daily gasoline production rising slightly to an average 9.2 million barrels. Distillate fuel production increased, too, to an average of nearly 4.1 million barrels per day. Gasoline demand, now averaging nearly 9.2 million barrels per day, is up 0.7% from year-ago levels, says EIA. Distillate fuel demand, though, remains 11% below last year's seasonal level.

Optimism prevailed among traders in the energy sector this week. The 8.7% gain in crude oil prices was trumped by a 9.5% jump in gasoline and an 11.5% spike in heating oil. The velocity of product prices nudged refining margins higher, though at 15.1%, spreads are still below their 12-month average of 16.5%.

The ETF version of the 2-1-1 crack spread picked up $1.78, or 2.4%, this week (see "Crack Spreads For The Masses").

Oil's quarterly contango widened by an average 58 cents a barrel this week to $3.59. A three-month carry now earns hoarders an annualized yield of 10.6%. Stocks at the Cushing, Okla., terminus for WTI delivery remain stable at 30.8 million barrels.

Technically, September crude has rebounded from a successful 50% retracement of its February-June rally. MACD is ready to turn bullish. RSI is already bullish, though selling volume spiked yesterday as the stochastics indicator popped into oversold territory. Near-term support is at $64.45; a close below $62.47 would rattle oil bulls enough to signal exhaustion of the week's momentum.

*Note: To provide a longer-term perspective, we've pushed back the base for our real-time monetary inflation indicator to May 2006. The base previously was January 2008. The indicator represents the average annual rate of monetary inflation over the period. The current 12-month inflation rate is -3.1%.

Comments

[Dr. C.:]

Oil traders may be missing the bigger picture regarding crude stocks.

One barrel of oil (42 gallons) can yield 19.15 gallons of gasoline so it takes 2.2 barrels of crude to make 1 barrel of gasoline.

Last week 1.8 million barrel drawdown in crude was offset by an almost equal 1.8 million barrel crude equivalent increase (.8 million barrels x 2.2) in the form of gasoline.

In fact, over the last 6 weeks, crude stocks have decreased by 18.9 million barrels while gasoline stocks have increased by 13.8 million. This means the crude drawdown has been more then offset by a crude equivalent increase in gasoline stocks of 30.36 million barrels (13.8 million barrels of gasoline x 2.2 to equal crude equivalent energy inventory).

So energy inventory has seen a crude equivalent build of over 10 million barrels in the last 6 weeks.

Disclosure: short oil via DTO

see:
www.eia.doe.gov/kids/e...
tonto.eia.doe.gov/oog/...
tonto.eia.doe.gov/oog/...

Jul 23 09:31 AM

[john s. gordon:]

42 gals of crude can yield more than 19.15 gals of gasoline if you feed some of the excess D-2 to a cat cracker & generate more naphtha for reformer feed. also it will vary with the nature of the crude feedstock.
> jack

Jul 23 09:41 AM

[HardwoodFlo...:]

The article poses a good question: what should move a market?

Here's a thought: Is the SOR a reserve or a drain? I mean it was never used to sway the price of oil was it? What would the government want to do by manipulating the price of oil. Not help maintain political stability in places llike Russia or Saudi? They wouldn't do that.

One point (anecdotal):

Shipping is way down. A couple of years ago it was hard to find a trucker to haul a load not anymore. At one time finding containers was easy and cheap (they needed to get them to the ports to get them back to China) now getting containers is hard b/c they are all tuck in China. Point, commerce is way down.

There is just absurdity in many claims that propagate what people want to have happen in the market. These claims would move a market that is readily movable based on the low margin requirements 10%. I've been advocating moving the margin requirements to 30% mainly to watch the cockroaches run for the exits.

Here are some of the wild claims by "investors" talking their book:

1)world wide demand- Europe, Japan and the US represent 70% of demand. In order for the other 30% to move the needle would take serious escalations in demand all predicated on infrastructure improvements, economic stability and major economic growth. This would take generations to happen.

2)Chaos theory- Something someday will happen. Be it a hurricane, a war, some puny dictator saber rattling, a refinery fire or cold weather in Antarctica. Some basis for investing.

3)Driving "seasons"- there is a summer driving season, a winter holiday driving season, a labor day, memorial day, a thanksgiving driving season. sounds like it's pretty much all the time. Also, doesn't this "theory" fly in the face of the "global demand" story. If indeed it's global demand then what will a few extra miles in an ordinary weekend matter.

The best article I ever saw was written by two guys from Stanford who did an analysis that World Wide oil could be controlled with just $11Bln. Hum, so a market that has the power to destroy our GDP and economy can be controlled with just $11BLn. Now, I know we are all altruistic investors but what if some people got together and decided that they would sell the dollar short bid oil up and short the dow on the basis of the negative feedback loop would raise input costs to producers creating a margin squeeze then they would have to raise prices to consumers- thus killing the consumer. Now, how much money could be made off such a trade? Maybe we should ask Soros.

Jul 23 06:47 PM

[HardwoodFlo...:]

j gordo- so what your saying is that there is alot more refined gas out there - relative to oil demand.

Jul 23 06:49 PM

[G. L. Turner:]

Hmmm...Hardwood, you are usual on point! you wrote: "The best article I ever saw was written by two guys from Stanford who did an analysis that World Wide oil could be controlled with just $11Bln. Hum, so a market that has the power to destroy our GDP and economy can be controlled with just $11BLn. Now, I know we are all altruistic investors but what if some people got together and decided that they would sell the dollar short bid oil up and short the dow on the basis of the negative feedback loop would raise input costs to producers creating a margin squeeze then they would have to raise prices to consumers- thus killing the consumer. Now, how much money could be made off such a trade? Maybe we should ask Soros."

So, let's ask further, who got some extra pocket change from Mr. Paulson a few months back - I believe it was some $13BN channeled through AIG's rescue...so we could lay off $11BN in the oil futures trade and use the other two between shorting the dollar and the Dow...and this was money that was 'supposedly already lost'...so it makes real good dice-rolling dough, right?

Hmmm...wonder who has that kind of pocket change??

Jul 24 12:50 AM