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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Weekly Oil Inventories Report

The API data released yesterday evening showed across the board draws. The API reported a large draw in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 4.6 million barrels, as crude oil imports decreased and refinery run rates also decreased by 2.1%. The API reported basically small draw in gasoline stocks versus projections for a modest build and a larger-than-expected draw in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline with a small draw in distillate fuel inventories this week. The report is somewhat bullish for the entire complex.

It is difficult to differentiate whether the price gains overnight were from the inventory report, or from the falling U.S. dollar and positives out of Europe. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver.

The more widely watched EIA data will be released this morning.  Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today. Finally keep in mind that the large variations from the expectations are likely related to the industry starting to adjust their inventories for LIFO accounting purposes.

Crude Oil Inventories Report

Oil remains mostly coupled to the direction of the U.S. dollar and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background, which does not seem like it will happen anytime soon. As such it is uncertain if many market participants are going to pay much attention to this week’s round of oil inventories data as Europe and the U.S. are still in the midst of uncertainty, suggesting that this week’s oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the tick-by-tick direction of equities and the U.S. dollar (driven by Europe), as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. The normal weekly reports get underway this afternoon when the API data will be released, followed by the more widely watched EIA data on Wednesday morning.

Projections for this week’s inventory reports are summarized in the following table. We can expect:

  • Mixed inventory data with a small increase in refinery utilization rates, which should result in a neutral weekly report
  • A modest draw in crude oil stocks with an increase in refinery utilization rates
  • A modest build in gasoline inventories and only a small draw in distillate fuel stocks as winter weather has still not arrived in most parts of the U.S., especially the large heating oil market along the north east.

If the reported numbers are in sync with projections, the year-over-year deficit of crude oil will narrow to about 8.2 million barrels while the overhang versus the five-year average for the same week will come in around 10.4 million barrels.

Weekly Oil Inventories Reports

The API data yesterday showed across the board builds. The API reported a small build in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 0.5 million barrels as crude oil imports increased and refinery run rates also decreased by 1.4%. The API reported basically no change in gasoline stocks versus projections for a modest build and an expected build in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline and distillate fuel inventories this week. The report is somewhat bearish for the entire complex. The report has resulted in selling in the market overnight. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week, with inventory data a secondary driver. The API reported a build of about 0.5 million barrels of crude oil with a 0.1 million barrel build in Cushing and a build of about 1 million barrels in PADD 2. This is bullish for the Brent/WTI price spread, which has been somewhat range bound since the middle of November. On the week, gasoline stocks were about unchanged while distillate fuel stocks built by about 1.2 million barrels.

The more widely watched EIA data will be released this morning.  Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today.

Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background. At the moment all market participants are continuing to follow the tick by tick direction of equities and the U.S. dollar (driven by Europe), as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price, it is the macro trade that dominates at the moment. As such this week’s oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report.

Weekly Oil Inventories Report: Builds in All Three Reported Commodities and Prices are Mixed‏

The Energy Information Administration (EIA) has issued its weekly oil inventories report for the week ending Friday, November 25, 2011.  Comparisons of the earlier and less-followed API report, projections for this week’s EIA report, and today’s EIA report are shown below.   This report is “bearish” as most inventories are generally more robust than projected.

    Weekly Oil Inventories Reports for the Week Ending Friday November 25, 2011

Million Barrels

API Report

Projections

EIA Report

Crude Oil

3.4

0.9

3.9

Gasoline

-0.2

1.0

0.2

Distillate

1.3

-1.0

5.5

Upon the EIA’s report release, light crude oil was trading $100.92 per barrel, up $1.10 from yesterday’s close for January, largely from tensions in the Middle East.  Natural gas for January was trading at $3.55 per MMBtu, down $.07 from yesterday’s close on robust supply/demand ratios in most areas.

While early forecasts called for a net natural gas storage build of about 10 Bcf when the EIA releases its weekly data on December 1, revisions are taking that number lower as traders assess the likely impact of some chilly weather on storage building. While forecasts run widely from modest draws to a build of up to 20 Bcf, most outlooks now suggest a build of about 8 Bcf, which will compare bearishly to a 29-Bcf five-year-average withdrawal and a 21-Bcf pull reported in the same week last year.

World Economy

Europe remains the main risk asset price driver, but other things are happening around the world and some of these are also working their way into the mix as a market price driver. Overnight the Chinese government cut bank reserve requirements by 0.5% from December 5th onward as China now seems to be moving toward an accommodative monetary policy. The move by China was welcomed in the market place as China now seems to be joining the developed world economies and slowly starting to stimulate the largest economic growth engine in the world.

European Finance Ministers agreed yesterday to guarantee as much as 30% of new bond sales from problem member countries to enhance the regions bailout fund and to enhance its ability to cap yields by also buying bonds. In addition the Finance Ministers are seeking a larger role for the IMF and the ECB in fighting the debt problems. Europe is continuing to move forward in trying to solve their debt issue problems with the market still somewhat skeptical that it is even a solvable problem in the short term. But at least for the moment the panic mentality has been somewhat abated. The cloud of uncertainty remains in place, but it is not getting any larger at the moment.

On top of all of the economic issues around the world, the geopolitical risk in and around the greater Middle East is continuing to widen. At the heart of the problem is the evolving nuclear situation in Iran and the ramifications of many direct and indirect actions slowly taking place by the West. A new round of sanctions by the U.S. is moving forward that are designed to make it more difficult for Iran to receive payment on its crude oil sales. China, Japan and India, along with the EU region, are the main buyers of Iranian crude oil. In addition to the U.S. sanctions, the EU Foreign Ministers are meeting tomorrow to discuss the issue of Europe embargoing Iran crude oil from the region. Whether or not they will do it remains to be seen, but if they do impose such an embargo, we can expect the Saudis to step up and replace those barrels. It is not likely to see a sustainable price spike in the event that the Europeans embargo Iran, as Saudi oil will offset and solve the logistics. However, if the Saudis do not step up to the table (a low probability) then of course we will see a price spike of some magnitude.

Even with protesters moving into the UK Embassy yesterday, oil prices have been relatively calm with only a minimal risk premium currently embedded in the price. The fact that Iran and Syria have moved further into the forefront of events that could result in a potential supply disruption they will at a minimum keep a floor on any major price selling at this time.  Also with the fragility of the global economy, especially Europe, along with the growing geopolitical risk in the Middle East, the December 14th OPEC meeting is going to be very interesting to say the least. We are likely to see a clash of perspectives between those calling for a cut back to pre-Libyan civil war levels and those suggesting no change. It is likely there will be no change at this time, especially with Brent still well over $100/bbl and WTI within shouting distance of a triple digit price level.

Weekly EIA Oil Inventories Report: Draws in All Three Reported Commodities and Hydrocarbon Prices are Down‏

The Energy Information Administration (EIA) has issued its weekly oil inventories report for the week ending Friday, November 4, 2011.   Comparisons of the earlier and less-followed API report, projections for this week’s EIA report, and today’s EIA report are shown below.This report is “bullish” as most inventories were materially less robust than projected.

Upon the EIA’s report release, light crude oil was trading $96.14 per barrel, down $.66 from yesterday’s close for December, largely on jitters from economic uncertainty in Europe. Natural gas for December was trading at $3.667 per MMBtu, down $.078 from yesterday’s close.

Analysts anticipate this week’s natural gas storage report from the EIA will show a net injection from as low as 17 Bcf to as high as 50 Bcf, with an early consensus around 26 to 33 Bcf. The data will compare against historical average builds including a 23-Bcf five-year-average injection and a build of 26 Bcf for the same week in 2010.