Oil inventories steady despite pipeline leak

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“Wisdom is knowing when to speak your mind and when to mind your speech.”

Evangel

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The Enbridge pipeline leak continued to dominate the oil complex throughout Monday along with another positive day for equities and a declining US dollar. As shown in the following continuation chart of the spot Nymex WTI crude oil contract prices have broken out of the consolidation pattern to the upside as a result of the Enbridge pipeline shutdown. Prices were in a narrow trading range or consolidation pattern for about 10 days prior to the breakout. If the pipeline remains shut down, prices will test the psychological resistance level of $80/bbl and then the more challenging technical resistance level of $82.60/bbl as shown on the chart. The market is running on emotions and not paying very close attention to the fact that oil supply is robust and more than adequate to compensate for the loss of imported oil via the pipeline for an extended period of time. Prices will remain firm until it becomes known when the line will be restarted. As I will discuss below, the market will likely gain additional support from this week’s inventory report which is expected to show a sizeable draw mostly related to the loss of crude oil from the pipeline. However, inventories outside the US are a bit more in balance and, as Goldman predicted yesterday, they expect inventories to continue to decline and are expecting price to eventually breakout of the upper technical range resistance level and trade in a new trading range of $85/bbl to $95/bbl before the end of the year. I would view Goldman’s bullish prediction with a bit of caution as they have predicted a bullish move several times this year that did not materialize.

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 its regular time on Wednesday morning. 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 a mixed report with draws in both crude oil and gasoline and a modest build in distillate fuel. If the actuals are in sync with my projections for a crude oil draw of 2.5 million barrels it will be the second week in a row of declines. It would be a bullish outcome for the week but the year over year surplus will still be at 24.6 million barrels while the overhang versus the five year average for the same week will be at 42.1 million barrels.

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