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By Sumit Roy

Inventory data was overshadowed by a surprise OPEC meeting, as the market eyes a huge supply gap in the third quarter.

The U.S. Department of Energy reported that in the week ending June 3, 2011, U.S. crude oil inventories decreased by 4.8 million barrels, gasoline inventories increased by 2.2 million barrels, distillate inventories increased by 0.8 million barrels and total petroleum inventories increased by 1.5 million barrels.

Brent crude oil prices zoomed to their highest levels in a month above $118 today, but it wasn't because of the latest U.S. inventory figures. Rather, all eyes were on the OPEC meeting, the result of which was quite a surprise. The cartel failed to reach any decision on quotas, a result that leaves them intact by default. This failure comes as a surprise, as analysts expected an increase of 1 million to 1.5 million barrels per day.

Saudi Arabia, Kuwait, Qatar and the UAE were said to have proposed a 1.5 mmbbl/d increase, but opposition from Iran, Angola, Venezuela, Libya, Algeria and Ecuador made it so a compromise was not reached. “It was one of the worst meetings we've ever had,” said the Saudi oil minister.

But even if an increase in quotas had been announced, it would only formalize the fact that most OPEC members are already pumping above their quotas. Various estimates peg this overproduction near 1.5 million barrels per day.

In the International Energy Agency's last report, it said OPEC would need to pump 30.1 mmbbl/d in the third quarter of this year to meet demand. With actual OPEC output last estimated to be 28.75 mmbbl/d, inventories will decline sharply, barring an increase from the group. Thus, all indications are that Gulf members, led by Saudi Arabia, will increase their production despite today's official announcement.

But even so, a 1.35 mmbbl/d gap will be difficult to fill; thus, we see this very reasonable bullish bias in crude oil prices.

Turning back to this week's U.S. inventory data, we saw that total petroleum inventories rose by 1.5 million barrels, which is slightly more than normal. The surplus versus the five-year average now stands at 22 million barrels, or 2.1 percent.

Crude inventories declined much more than normal, which send the surplus over the five-year average down to 26.3 million barrels, or 7.7 percent. Inventories both in the Midwest and outside the region declined.

Gasoline inventories continued to rise swiftly last week, with the surplus over the five-year average now at 5.4 million barrels, or 2.6 percent. Distillate inventories rose for the first time in nine weeks, but the surplus versus the five-year average still declined to 8.2 million barrels, or 6.1 percent.

Demand

U.S. petroleum demand ticked up just slightly week-over-week thanks to surprisingly strong gasoline consumption. On a four-week rolling basis, total demand is now down 3.9 percent year-over-year, but gasoline demand is actually up by 0.3 percent. Distillate demand is down 4.9 percent.

Imports

Crude oil imports plunged 0.9 million barrels per day last week. On a four-week rolling basis, imports have been down 0.7 mmbbl/d from last year, due to a combination of declining demand in the U.S., increasing demand elsewhere and Libyan supply disruptions.

Refinery Activity

Refinery utilization hit its highest level of the year at 87.2 percent, up from 86 percent a week ago, though it remains below the levels of a year ago and the five-year average. Gasoline production was flat near 9.4 mmbbl/d, while distillate production rose to 4.4 mmbbl/d.

Miscellaneous

U.S. crude oil production was flat near 5.6 mmbbl/d, as output continues to stand near the highest levels since 2004, thanks to surging output in unconventional oil plays.

Inventories at the NYMEX delivery point in Cushing, Okla. fell about 1 million barrels to 38.9 million, or 67 percent of the EIA's estimate of capacity. Overall, Midwest inventories fell over 2 million barrels to 100.8 million barrels, or 80 percent of estimated storage capacity. Front-month WTI calendar spreads were little changed week-over-week at -0.54.

Meanwhile, West Texas Intermediate's discount to Brent expanded to an astounding record of $17.69 from $15.38 last week. The large 591 Kbbl/d Keystone pipeline resumed pumping crude to Cushing after being briefly shut down. The glut in Cushing and the overall Midwest region continues to be responsible for the extremely large spread between WTI and other crudes, but it's hard to pinpoint a catalyst for this latest increase in WTI's discount.

Source: Petroleum Report: Supply Concerns, Record Brent Spreads