This Week's Oil Guesses Off the Mark

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 4.4%

One could say that oil traders rode a roller coaster this week as the market geared up for the latest government oil inventory report. December NYMEX crude climbed 87 cents to $79.55 a barrel in Tuesday trading after settling down $1.82 at $78.68 on Monday. Prices then sagged below $79 in the overnight market ahead of Wednesday's opening bell and the release of the U.S. Energy Department's weekly fuels tally.

Guesses on the government's oil reckoning were all over the Street Tuesday. Figures released late in the day by the American Petroleum Institute projected crude inventories falling by 3.5 million barrels. Sell-side analysts, however, were eyeing a build between 900,000 and 1.9 million barrels.

Oil Patch watchers figured gasoline supplies would be drawn down by 300,000 barrels, while distillate stocks—including heating oil and diesel—would likely decline between 900,000 and 1 million barrels (click to enlarge).

Domestic Oil Inventories

Actual oil inventories reported by the Energy Department Wednesday morning increased by 800,000 barrels, keeping supplies above average for this time of year. Gasoline stocks jumped by a more-than-surprising 1.7-million-barrel margin. The only drawdown for the week was for distillate fuels, which fell by 2.1 million barrels.

For the week ending Tuesday, traders were fairly disposed to drawdown notions on crude oil and gasoline, but were bearish on middle distillates. Crude oil rose 0.6% on the week, against a 0.7% uptick in gasoline prices. Heating oil fell 0.9%.

Last week, crude oil's open interest fell for the first time in a month as commercials liquidated positions across the board. Meanwhile, money managers built up long exposures. Small speculators flipped back to a net long exposure after a two-week short excursion as swap dealers virtually flattened out their risk exposure.

Refineries operated at 81.8% of capacity, pretty much unchanged from the previous week's rate. Daily gasoline production increased slightly, to an average 8.8 million barrels, while distillate fuel production fell to 3.8 million barrels per day.

Helped by higher gasoline cracks, this week's refinery runs improved. Margins on 3-2-1 cracks averaged 9.4%, narrowing the advantage commanded by 2-1-1 operations (definitions of these refining runs can be found in "Time (Again) For Crack Trades.")

Still, the premium earned by lighter, sweeter West Texas Intermediate crude over North Sea Brent fell this week to an average $2.74 a barrel. Last week, the U.S. benchmark sold at a $3.50 premium.

Oil's three-month roll widened this week from $1.42 a barrel to $1.81, indicating traders' diminished interest in storage.

Government figures show daily gasoline demand averaging 9.1 million barrels, up 1.9% from the same period last year. Distillate fuel demand has averaged 3.6 million barrels per day, down 13.1% from year-ago levels.

Nearby NYMEX Crude Oil

Technically, December crude oil remains stalled below the $80 mark. Stochastics have turned down and the RSI is threatening to turn bearish. MACD is still positive, but there are hints that last Wednesday's flirt with $82 may be a short-term top. A close below the 20-day moving average at $75.90 would provide confirmation.

Resistance should be expected at $82, while support is likely at this week's low of $77.64.

Comments

[SeekingTruth:]

Brad, Great charts and discussion.
Interesting that Gasoline "Stocks" UP 1.7 million barrels at the same time average daily Gasoline "Demand" at 1.9 million barrels, UP 1.9% from same period last year.
This suggests to me that the refiners did not let us down relative to actual demand, currently at least. Perhaps they were preparing for seasonal effects including partial shutdowns well ahead of time. You and others know this far better than I.
Seasonal factors and inventories make your suggested ETF crack trade look more and more feasible (if I interpreted it correctly).

Oct 28 04:07 PM