Crude Oil

Crude Oil Market

Slightly positive news from Europe on Wednesday and a huge draw reported in the latest EIA weekly oil inventories report were enough to move oil prices higher and WTI one step closer to the triple digit price level. The large draw was viewed as modestly bullish since a good portion of the draw was likely related to end-of-the-year LIFO inventory adjustments. With few important comments or news snippets hitting the media airwaves over the next week or so (due to the holidays), many risk asset markets could experience a continuation of the short covering rally started a few days ago.

The ongoing story of Iran and the broader Middle East (including Iraq now that the U.S. military is gone) will continue to act a put in the oil market with exposure for price spikes at any time. The geopolitics of the region will once again be on the radar and will from time to time act as the main price driver for the oil complex. There are enough geopolitical events evolving in Iran, Iraq, Egypt, Syria, Kazakhstan and Nigeria to suggest that over the medium, term supply issues could emerge. The most active at the moment are the protests in a major oil city in Kazakhstan that could impact oil flow and exports from that area while a major Shell pipeline spill in Nigeria has cut production of a 200,000 bpd export flow.

Weekly EIA Oil Inventories Report

The inventory report showed a modest build in total stocks, an as-expected build in distillate inventories, along with a huge build in gasoline stocks as implied demand was higher while refinery utilization rates declined strongly on the week to 85.1% of capacity a decrease of 2.6% in refinery run rates. The data are summarized in the following table along with a comparison to last year and the five year average for the same week.

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Total commercial stocks of crude oil and refined products decreased strongly on the week by 18.2 million barrels. The year-over-year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 38th week in a row. The year-over-year deficit widened to 41.3 million barrels while the overhang versus the five-year average for the same week came in around 5.1 million barrels.

Crude oil inventories decreased versus an expectation for a much smaller draw with a major decrease in PADD 3. With a decrease in stocks this week, the crude oil inventory status versus last year is still showing a wide deficit of around 17.1 million barrels while the surplus versus the five-year average for the same week narrowed to around 1.5 million barrels. PADD 2 stocks increased by 0.8 million barrels on the week while Cushing stocks declined by about 1 million barrels. Crude oil inventories in this region of the U.S. have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI price spread was trading at significantly lower levels. The price spread continues to trade in a trading range of between $9 to $11.50/bbl premium to Brent.

Distillate stocks decreased versus an expectation for a modest build. Heating oil/diesel stocks decreased by 2.4 million barrels as exports seemed to increase on the week. The year-over-year deficit widened to 21.6 million barrels while the five-year average deficit widened to about 4.3 million barrels.  With the economics and demand still likely to hold outside the U.S. and unless the upcoming winter heating season comes in much colder than any of the expectations, the current level of exports will likely continue.

Gasoline inventories decreased modestly on the week versus an expectation for a modest build. Total gasoline stocks decreased by about 0.4 million barrels on the week versus an expectation for a build of about 1.0 million barrels. The surplus versus last year came in at 1.2 million barrels while the surplus versus the five-year average for the same week narrowed to about 8.9 million barrels.

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About JWM Energy Consultant
Professional Energy Consultant. I advise large energy-users on procurement strategies to reduce electricity and natural gas costs.

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