Petroleum Inventories: Everything Was Drawn Down

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 4.0%

Crude oil futures climbed further in overnight trading after rising nearly 2 percent in the Tuesday NYMEX floor session. Buoyed by outside influences, oil prices were also driven by the release of bullish industry data.

Ahead of Wednesday morning's definitive inventory report by the U.S. Energy Department, a survey conducted by the American Petroleum Institute anticipated domestic crude stockpiles falling by 3.4 million barrels. Sell-side analysts, however, had been looking for a 1.4 million-to-1.5 million barrel build to be reported.

Energy Department figures showed crude inventories actually decreased by 4 million barrels from the previous week. At 335.9 million barrels, domestic crude stocks are near normal levels for this time of year.

API's forecast of refinery utilization—a drop of 1.3 percentage points to 80.5 percent of capacity—was pretty much dead-on. The Energy Department reported refineries operated at 80.6 percent of operable capacity last week. Gasoline production increased, averaging 9.0 million barrels per day, while daily distillate fuel production increased to 4 million barrels.

Prior to the government's inventory report, API estimates of gasoline stocks differed from the Street consensus only by degree. The industry-supported trade group forecast motor fuel supplies rising by 501,000 barrels, while analysts called for an increase between 300,000 and 400,000 barrels. The government's report showed inventories actually shrunk by 300,000 barrels.

This week, industry and the Street squared off on expectations about distillate fuel inventories. API figures indicated a likely increase of 1.8 million barrels vs. analysts' anticipated 1-million-barrel drawdown. As it turned out, Wall Street was vindicated by the Energy Department's report, which showed stockpiles decreasing by 400,000 barrels.

Reflecting traders' uncertainty about supply, the petroleum complex churned in the week ending Tuesday, but ended up essentially flat. Crude oil's net advance amounted to just a nickel a barrel, and product prices were narrowly mixed, all of which led to some compression in refiners' margins. Wintertime 2-1-1 crack spreads gave up 35 cents a barrel this week.

NYMEX Futures Vs. ETF Crack Spreads

West Texas Intermediate crude's per-barrel premium over heavier North Sea Brent slipped to $2.48 from last week's average of $2.61. Meantime, the NYMEX three-month roll remained essentially flat, averaging $1.79 a barrel versus $1.81 last week. Annualized carrying costs now average 2.7 percent.

Investment interest in crude oil reached new heights last week as money managers—speculative investment funds—built a record net long exposure in futures. In a countermove, swap dealers flipped to a net short position for the first time since December 2008. Presently, money managers are the only long trading block in the futures market; commercial users/producers, swap dealers and noninstitutional traders are all short.

NYMEX Front-Month Crude Oil

The December NYMEX contract came into Wednesday's inventory report stalled at the $80 level. While it's trading above its short-term moving averages, some technical indicators paint a neutral-to-bearish picture for the contract. MACD turned downward on last Friday's sell-off. Stochastics have yet to turn up and the RSI indicator is still drifting downward from previously overbought levels. The market's last volume spike, too, occurred on a down day.

A close below the December's 20-day moving average at $77.91 would bolster traders' bearish resolve. Underneath, support ought to be expected at the psychologically significant $75 level. Upside resistance rests at this week's high of $80.46. Bulls will likely set the fall rally high watermark of $82 as their objective.

Comments

[Ferdinand E...:]

This author has something important to say, but although I like to claim that I know everything worth knowing about oil markets, I can't figure it out. For example, his description of the behaviour of swap dealers might sound good to some observers, but definitely not to my good self.

Nov 05 10:54 AM

[e2800:]

We always get the headlines from the main sources, you know them GDP, up 3.5%, home prices up 10%. Rarely do we ever get the underlying numbers, or an honest analysis.
Today's stories on the crude inventory numbers again give the headline number with no analysis. Headline says, "Crude Rises on Decrease in Stocks". Lets take a look at the report.
1) Oil refineries are running at 80.6% of capacity. This is extremely bearish.
2) Refinery inputs were 233,000 barrels per day below last weeks average. Bearish.
3) U.S. Crude oil imports were down 764,000 barrels per day from the previous week. Bearish.
4) For the last 4 weeks imports have averaged 1.5 million barrels per day less than the same period a year ago. Bearish.
5) U.S. crude inventories are near the upper limit of the average range for this time of year. Bearish
6) Total motor gasoline inventories are above the upper limit of the average range. Bearish.
7) Distillate fuel demand is down 14.8% year over year, jet fuel demand down 3.1%.
Bearish

There is more, but you should get the picture. A decline in stocks right now is due to a demand problem, not a supply problem. All of the above statistics point directly to a decrease in demand for crude and distillates. If refineries were running at 90+% of capacity, maybe, maybe we could see a supply problem, but not now.
One other thing, the latest COT report shows approx. 227,000 money managed fund long contracts and about 24,000 short.
As the saying goes,"The market can stay irrational longer than you can stay solvent."

Nov 05 01:53 PM

[StockMaster...:]

A drop in inventories with the improving ISM makes for a bullish oil case since everyone is saying there is no fundamental reason for oil to be where it is. Oil at $75 may be the last time it is there for a while, buy it down there.

Nov 05 08:57 PM

[bigbear4511:]

The 4 million imports draw could just be sitting in the gulf of Mexico. They say the offshore oil tankers storage is getting higher and higher up from 60 to 125 million barrels. If there is a correction all these people storing oil will dump their product on land and the price of oil will plummet. Oil is really riding the edge. Cheap oil really help this economy gain footing.


On Nov 05 01:53 PM e2800 wrote:

> We always get the headlines from the main sources, you know them
> GDP, up 3.5%, home prices up 10%. Rarely do we ever get the underlying
> numbers, or an honest analysis.
> Today's stories on the crude inventory numbers again give the headline
> number with no analysis. Headline says, "Crude Rises on Decrease
> in Stocks". Lets take a look at the report.
> 1) Oil refineries are running at 80.6% of capacity. This is extremely
> bearish.
> 2) Refinery inputs were 233,000 barrels per day below last weeks
> average. Bearish.
> 3) U.S. Crude oil imports were down 764,000 barrels per day from
> the previous week. Bearish.
> 4) For the last 4 weeks imports have averaged 1.5 million barrels
> per day less than the same period a year ago. Bearish.
> 5) U.S. crude inventories are near the upper limit of the average
> range for this time of year. Bearish
> 6) Total motor gasoline inventories are above the upper limit of
> the average range. Bearish.
> 7) Distillate fuel demand is down 14.8% year over year, jet fuel
> demand down 3.1%.
> Bearish
>
> There is more, but you should get the picture. A decline in stocks
> right now is due to a demand problem, not a supply problem. All of
> the above statistics point directly to a decrease in demand for crude
> and distillates. If refineries were running at 90+% of capacity,
> maybe, maybe we could see a supply problem, but not now.
> One other thing, the latest COT report shows approx. 227,000 money
> managed fund long contracts and about 24,000 short.
> As the saying goes,"The market can stay irrational longer than you
> can stay solvent."

Nov 06 02:15 AM

[bigbear4511:]

A drop in inventories could easily be attributed to imports just being store on offshore oil tankers. 125 million barrels stored offshore and rising can easily flood the market at anytime.

On Nov 05 08:57 PM StockMasterFlash wrote:

> A drop in inventories with the improving ISM makes for a bullish
> oil case since everyone is saying there is no fundamental reason
> for oil to be where it is. Oil at $75 may be the last time it is
> there for a while, buy it down there.

Nov 06 02:20 AM