Oil inventories increase significantly

At the moment US equity futures markets are also in negative territory pointing to a lower opening on Wall Street. The EMI Index lost about 0.1% overnight leaving the year to date loss for the Index at 1.5%. The most noteworthy change in the last twenty four hours is China’s Shanghai “A” Index losing ground and moving closer to the bear market threshold of a decline of 20%. After providing upside support to the oil and broader commodity complex, the tone in the equity markets may be changing a bit and are currently a negative for oil as we approach the middle of trading week.

Late yesterday afternoon the API released yet another surprise set of numbers as summarized in the following table along with my projections and a comparison to last year and the five year average for the same week assuming the EIA data is in sync with the projections. The API reported a build of 3.3 million barrels versus projections for a decline of around 2.5 million barrels. They also reported declines for both gasoline and distillate fuel as a result of lower refinery utilization rates and a modest bump-up in implied demand. As usual, I must caution to not get too excited about the API data which was very bullish for crude oil but bearish for both gasoline and distillate fuel. As I have discussed many times in this newsletter, the API data should be used for nothing other than just another projection for the EIA data and not a set a numbers that anyone should invest any trading capital in.

Today the EIA data will be released at 10:30 AM and after the surprise build in crude oil stocks in the API report and the lack of support coming from the financial markets, the EIA data will likely play an even larger role than normal in setting the stage for trading today. 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.

With runs expected to decline and demand slowly waning, I am expecting a modest decline in gasoline stocks and a small build in distillate fuel. Gasoline stocks are expected to decline by about 1 million barrels on a combination of carryover from the Labor Day holiday weekend in the US and the result of a 0.5% decline in refinery utilization rates. However, the year over year overhang will still be around 16.5 million barrels while the surplus versus the five year average for the same week will be at 27.6 million barrels. As I have discussed in previous newsletters, not only is the industry plagued with a huge surplus of gasoline in inventory but stocks continue to remain above the level they were at prior to the start of the higher demand summer driving season in the US.

Distillate fuel likely built by about 500,000 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.

The tropical weather situation is extremely active with two major hurricanes sitting in the eastern Atlantic and a newly named Tropical Storm hovering around the Yucatan Peninsula. None of these storms are a threat to the oil and Nat Gas producing region of the US Gulf Coast as shown in the following graphic (5 AM NOAA update). However Tropical Storm Karl could have an impact on oil producing and export operations out of Mexico over the next several days. As shown in the following graphic Karl is clearly heading to the main part of eastern Mexico and is currently projected to strengthen to hurricane status just prior to making landfall around Saturday morning. Although Karl could have an impact on oil operations in Mexico the impact is not likely to be overly severe or very long lasting as Karl will not be a major storm.

Both Igor and Julia are projected to turn into the northern Atlantic and definitely out of harm’s way of the sweet spot in the Gulf of Mexico. Also, neither of these storms is expected to actually threaten any part of the US East Coast. They are both major, category four storms that both have to potential to strengthen into category five storms. Igor is currently on a path to make landfall over Bermuda and then remain in the Atlantic while Julia does not appear to be heading anywhere near land anytime soon. At the moment, the tropical weather activity remains a concern but not one that warrants investing any trading capital at the moment.

My individual market views are detailed in the table at the beginning of the newsletter. I have made some minor adjustments to my market view rankings but am keeping my bias at neutral for today. I view the oil complex as moving back toward an overall bearish view but I am waiting on today’s inventory report before making any final adjustments. If the EIA data is in sync with the API crude oil build I would expect a rather strong sell-off in oil prices as the last $3/bbl or so move to the upside for WTI was mostly related to the Enbridge pipeline shutdown that now is expected to be relatively short lived and restarted by the end of the week. I addition we are seeing a bit of a transition in the market sentiment in the financial sector as the dollar firms and equities values are beginning to drift lower. So what started as a firm upside price week for oil may quickly end the second half of the week under pressure…especially if today’s EIA inventory report is the least bit bearish.

Best regards

Dominick A. Chirichella

dchirichella@mailaec.com

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