Oil turns bullish on supply and election

EMI Global Equity Index

11/3/10

Change

Change

2010 YTD

2010

From

From

Change

6:59 AM

Yesterday

Yesterday %

%

US/Dow Jones

11,189

64

0.58%

7.3%

Can/S&P-TSX

12,681

17

0.13%

8.0%

Lon/FTSE

5,765

8

0.14%

6.5%

Paris/Cac 40

3,885

19

0.49%

-1.3%

Germany/Dax

6,672

18

0.27%

12.0%

Japan/Nikkei

9,160

5

0.05%

-13.1%

HongKong/HangSeng

24,145

473

2.00%

10.4%

Aussie/SYDI

4,723

21

0.45%

-3.3%

China/Shanghai A

3,175

(15)

-0.47%

-7.6%

Brazil/Bvspa

71,561

888

1.26%

4.3%

EMI Global Equity Index

15,296

150

0.99%

4.2%

Late yesterday afternoon the API released their latest inventory assessment. The API released a strongly bullish inventory report showing a surprisingly larger than expected across the board build and a modest decline in refinery utilization rates versus expectations for a mixed report with more modest changes in inventories. The API reported a crude oil inventory draw of about 4.1 million barrels along with a large decline in gasoline stocks of just 3.2 million barrels while distillate fuel stocks declined yet again by a whopping 4.7 million barrels versus most expectations calling for a decline of about 900,000 barrels. The results of the API report are summarized in the following table along with my projections for this week’s EIA inventory report and a comparison to last year as well as the five year average for the same week. So far the reaction to the API report has been biased to the bullish side and has contributed to the overnight gain in prices even though the US dollar and global equity markets are only marginally supportive for oil prices so far this morning.

Projections

11/3/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(4.1)

1.5

31.8

45.1

Gasoline

(3.2)

0.3

7.0

15.5

Distillate

(4.7)

(0.9)

0.1

29.7

Ref Change Level

-0.4%

0.2%

3.3%

-0.8%

Utilization %

81.2%

83.9%

80.6%

84.7%

As usual do not overreact to the API data as the more widely followed EIA data will hit the media airwaves at 10:30 Am EST today. If the EIA report is within the projection I would expect the market to view the results as mostly neutral with a slight bias to the bearish side as total commercial stocks of crude oil and refined products are likely to have increased marginally. However, if the EIA data is more in sync with the API report we could see a strong surge in oil prices as total inventories would have destocked by over 12 million barrels on the week (sum of API inventory declines) and that is a very bullish outcome. With the election now in the history books and the Fed meeting results not due out until this afternoon this morning’s EIA report could play a larger than expected role in the short term price direction than originally anticipated.

The more widely watched EIA data is out this morning at 10:30 AM. As mentioned above with the significant surprises coming from the API data the market may be positioned to react more to the fundamental data than expected with the plethora of major events in the marketplace. However, the macros are still likely to be the main price drivers for the rest of this week at a minimum. My projections for this week’s EIA inventory report are summarized in the following table. I am expecting a mixed report with a modest build in crude a small build in gasoline stocks and another atypical modest decline in distillate fuel stocks. If the actual numbers are in sync with my projections for a crude oil build of about 1.5 million barrels it would be a bit concerning indicating that the destocking of late may not be taking hold. As such I would categorize this week’s crude oil inventory data as biased to the bearish side as the year over year surplus will be around 31.8 million barrels while the overhang versus the five year average for the same week will still come in around 45.1 million barrels.

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