More Oil Nationally, Less in Oklahoma

| About: iPath S&P (OIL)

By Brad Zigler

U.S. crude oil prices slumped this morning following the announcement of a larger-than-expected build in inventories. Stocks rose by 6.2 million barrels, according to data released by the U.S. Department of Energy this morning. Late Tuesday, the American Petroleum Institute had estimated the national stockpile increased by 4.9 million barrels, while analysts expected a build between 800,000 and 1.7 million barrels.

Government figures also showed a 2.5 million barrel drawdown in gasoline stocks, close to the API's guess of a 2.1 million barrel decline. Sell-side and independent analysts were eyeing a 1.0-1.5 million off-take.

Distillate fuel supplies were taken down by 1.8 million barrels, according to the Energy Department. The API estimated a build of 1.5 million barrels, while the Street forecast an increase ranging between 100,000 and 650,000 barrels.

Refineries operated at 82.7 percent of capacity vs. 82.5 percent the previous week. Gasoline production decreased to a daily average of 8.8 million barrels, while distillate fuel output fell back to 4.1 million barrels.

Gasoline demand, at a daily average of 9.1 million barrels, is down 1.6 percent from this time last year. Distillate fuel consumption now averages 3.8 million barrels per day, up 7.3 percent from year-ago levels.

Trading Week

This week's 3.8 percent spike in crude oil prices put a crimp in refiners' margins. Heating oil's 2.3 percent rise was slightly ahead of the 2.2 percent gain in gasoline prices. With refineries now switched over to springtime product mixes, gasoline-rich runs fetched 22.0 percent, down from last week's 25.1 percent margin. Distillate-heavy operations grossed 21.9 percent vs. 25.1 percent last week.

The ethanol crush margin dipped by 6 cents a bushel on declines in the proceeds for the final fuel and dry grains. This week, gasoline's premium over the alcohol fuel rose by 5.37 cents a gallon.

Projected oil price volatility, metered by the CBOE Crude Oil Volatility Index (OVX), fell to 30.5 percent from 32.4 percent last week. The cost of protective puts, however, rose on the week.

Average daily volume for Nymex WTI futures fell 43.1 percent to 484,612 contracts. Open interest dropped by 4,689 contracts to 1.548 million.

Brent crude's premium over WTI fell from $15.47 a barrel to $12.56, while WTI's contango shrank significantly. Last week, a three-month roll cost $1.47 barrel vs. 87 cents this week. The whittling of Brent's premium and WTI's contango reflect a 700,000-barrel drawdown in WTI inventories at the Cushing, Okla. delivery terminus.

Technical Picture

After a run-up into overbought territory at the beginning of April, WTI crude has fallen back to near-term support and fibrillated at the $112 level ahead of this week's inventory report. Still, there was a bullish crossover in the MACD indicator on Monday. Both the volatility and the momentum indicators are trending downward.

Close-in support is at $108.84, while any move up to $113.77 would be discounted as normal volatility. Deeper support can be expected at $103.87, a key retracement level of the 2008 market decline. Bulls' next objective is $122.93, another stair-step in the recovery of 2008 losses.

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