Oil inventories higher than before summer

As mentioned yesterday the EIA will release their latest Short Term Energy Outlook later today. I am expecting a downward adjustment to the projections for oil demand growth for the remainder of 2010 as well as 2011. I am expecting a similar adjustment in Friday morning’s IEA monthly oil forecast as the global economic recovery is simply stalling. If oil demand stalls, the only possible way the overhang in inventory is going to begin to recede will be if OPEC reigns in supply and cuts production at their October gathering. If not, I would expect that the industry will be entering the upcoming winter heating season at near record high inventory levels for pretty much everything.

Today the oil inventory cycle will get underway when the API releases their weekly report after the oil market closes while the EIA data is expected to be released at 11 AM tomorrow morning. The weekly oil inventory cycle gets underway with the release of the API data late this afternoon followed by the more widely watched EIA data at 10:30 AM EST on Wednesday and thus the market will get the latest snapshot of the current oil fundamentals. My projections for this week’s inventory report are summarized in the following table along with a comparison to last year as well as the five year average for the same week. I am expecting builds in everything except gasoline which should show a modest decline as a result of the long holiday weekend in the US. Crude oil stocks are expected to grow by about 800,000 barrels. After last week’s significant build, I am expecting imports to not be nearly as robust as last week but enough to offset the minor increase I am projecting for refinery utilization rates of 0.1%. If the EIA data is in sync with the projections the year over year surplus will widen to 25 million barrels while the overhang versus the five year average for the same week will come in at 40.3 million barrels.

With runs expected to hold steady and demand slowly waning, I am expecting a small decline in gasoline stocks and a modest build in distillate fuel. Gasoline stocks are expected to decline by about 300,000 barrels as wholesalers likely moved gasoline into secondary inventories in preparation for the long holiday weekend in the US this week. However, the year over year overhang will still be around 17.9 million barrels while the surplus versus the five year average for the same week will be at 28.6 million barrels. As I have discussed in previous newsletters, not only is the industry plagued with a huge surplus of gasoline inventory but all signs point to the summer driving season ending with inventories above where they started the season at the end of May.

Distillate fuel likely built by about 600,000 barrels as economy sensitive diesel fuel implied demand continues to decrease and follow the slowly developing downtrend that has been in place since about May of this year, or around the same time the US economy began to slow down. Implied distillate demand peaked in mid- May at a tad over 4 million barrels per day and has declined about 10% since then. I would categorize this week’s oil inventory snapshot as biased to the bearish side if the EIA data is in sync with the projections. A

s usual do not overreact to the API data which will be released late this afternoon as more often than not it is not in line with the more widely followed EIA data.

The tropical weather situation is continuing to change but there is still nothing threatening the oil and Nat Gas producing region of the US Gulf Coast. There are now three events in play as of this writing as TS Herminie has already made landfall and completely out of harm’s way of any oil and Nat Gas supply operations. The remnants of TS Gaston is still a low probability event sitting in the Caribbean while the two Atlantic events are still evolving. One remains a low probability weather pattern, as of this time, while the one closer to West Africa has been upgraded to a high or 50% probability of strengthening into a tropical cyclone over the next forty eight hours. Although none of these events are a threat to energy operations (as of now) my concern with the tropics remains the rapidity with which new storms keep emerging out of the West Africa. However, so far the tropics have been a non-event as most of the storms have worked their way into the north Atlantic just as the two patterns sitting close to West Africa appear to be heading at this time. So nothing to warrant allocating any trading capital on but rather we need to only keep the tropics on our radar.

My individual market views are detailed in the table at the beginning of the newsletter and remain the same for today. Currently ,oil is lower while Nat Gas is showing a slight gain as this shortened trading week continues.

Best Regards

Dominick A. Chirichella

dchirichella@mailaec.com

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