Crude stocks continue to rise so of course crude should rally. Crude stocks rose by 1.6 mm barrels, higher than the expected 1.0 mm barrels. Crude prices, keying off an unexpected draw in gasoline, rallied $1.20 to close just shy of $69.
Crude stocks are now at nine year highs. Hmmm, what were prices like in 1998. Not saying we should go to $12 again, but should we really be near the upper end of the band?
Gasoline: Expected - UP 1 million Bbs. Actual - DOWN 700,000 Barrel. Finished gasoline inventories actually rose! However, blending components were responsible for the total gasoline drawdown which, combined with the higher utilization, mean that we should look for higher production levels next week as refiners prepared to produce more gasoline.
The EIA wrote an interesting piece that potentially explains the recent divergence between gasoline production and refinery utilization. In a nutshell, it attributes the split to a combination of the use of finished oils and other blending components being added to blend gas volumes. They concede that a certain amount of tweaks at the refineries themselves can result in a small amount of increased production. I'm not sure they're giving enough credit to the last point, but this is occurring, and it means that as utilization returns to high levels, the increase in production won't be linear.
My short-term thinking is that we would see a near-term bounce in wholesale prices and prices at the pump (especially with the coming holiday weekend).
However one week does not a trend reverse, and the longer term trend is towards a narrowing of the year-over-year inventory deficit which should ease RBOB (probably next Wednesday), ease crack spreads, and ease the price of the refining stocks.
Here's a look at the gasoline numbers:
Utilization recovered to 89.4% but production remains flat at 9.3 MM Bpd. Utilization rose by double the amount expected. This a better indicator that production will be on the rise next week than anything else. Production continued to climb although at a pretty slow rate.
Imports again suffered a set back. This is about the time of year when they start falling off as other markets compete for those volumes.
Gasoline demand remains high but actually retreated slightly week-to-week. It's still pretty strong though, growing 1.4% on a y/y basis, and if imports begin to turn down and demand doesn't moderate further, gasoline prices will re-rally over the next few weeks. Beyond that, RBOB should moderate as the seasonal peak for demand passes.
Natural Gas Inventory Report Preview
Consensus range: 80 to 90 Bcf.
< 80 Bcf = gas rallies
80 to 85 Bcf = gas rallies mildly
85 ot 95 Bcf = gas treads water
> 95 Bcf = short-term leg down, which would be a buying opportunity.
My number: 84 Bcf injection. You've got conflicting currents of warmer temperatures and higher imports both by land and by sea.
Temps: Cooling Degree Days (CDDs) rose from 51 in the prior week to a 2007 high of 59. Traders will also be keeping an eye on forecasts call for an increase in CDD to 68 for this week (next week's number). Heating degree days were a non-issue at 4.
Imports: Gross imports were up 0.6 Bcfgpd relative to last week (or ~ 4 Bcf more for the weekly tally).
LNG - rose back to 2.8 Bcgpd. I'd expect 3.0 to 3.5 Bcfpgd range to hold as long as U.S. prices don't collapse. Even if they do, it would be a fairly short-lived dip as the sudden dearth of imports would quickly jack prices back up.
Canadian Pipelines - increased 0.2 to 8.5 Bcfgpd. I expect this to continue its 2 steps lower and 1 step back up process as drilling and production activity north of the border dwindles and more gas is demanded for growing oil sands developments as well as other domestic consumption.
EOG Resources Inc. (NYSE:EOG) added more July $75s for $1.15. Sold in the afternoon for $1.50 (30% in 4.5 hours was too pretty to pass up, and my faith in natural gas holding up ahead of inventories being shaky made it an easy day trade.)
Halliburton Co. (NYSE:HAL) entered July $35s for $0.55, ended the day in them and up 55% at $0.85.
Tesoro Corp. (TSO) - closed out my July $57.50s for $3.20, a 22%, two-week gain. Nothing to write home about, until you consider my track record with the refiners this year.
Frontier Oil Corp. (NYSE:FTO) - bought August $40 puts for $1.45.