Oil down as dollar up ahead of G20

Late yesterday afternoon the API released their latest inventory assessment. The API released another strongly bullish inventory report (second week in a row) showing a surprisingly larger than expected across the board build versus expectations for a mixed report with more modest changes in inventories. The API reported a crude oil inventory draw of about 7.4 million barrels along with a large decline in gasoline stocks of just 3.4 million barrels while distillate fuel stocks declined yet again by a whopping 4.0 million barrels versus most expectations calling for a decline of about 1.7 million barrels. The results of the API report are summarized in the following table. So far the reaction to the API report has been non-existent as oil prices are in negative territory as the US dollar is firming and global equities are lower.

Projections

11/10/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

(7.4)

1.0

31.5

48.1

Gasoline

(3.4)

(0.7)

0.7

10.8

Distillate

(4.0)

(1.7)

(4.6)

27.1

Ref Change Level

3.1%

-0.2%

1.7%

-3.5%

Utilization %

84.3%

81.6%

79.9%

85.1%

My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report with a modest build in crude but with modest declines in both gasoline and distillate fuel inventories. If the actual numbers are in sync with my projections for a crude oil build of about 1.0 million barrels it would be a bit concerning indicating that the destocking of late may not be taking hold and it could result in capping the short term rally seen in crude oil prices over eh last week or so. 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 31.5 million barrels while the overhang versus the five year average for the same week will still come in around 48.1 million barrels.

With runs expected to decrease by only 0.2% but with imports slowing I am expecting only a modest decrease in gasoline stocks. Gasoline stocks are expected to draw by about 700,000 barrels as refiners continue to wind down from the higher demand summer driving season and turn their attention to the upcoming winter heating season. This week the gasoline year over year overhang is projected to decline at around the 700,000 barrel level while the surplus versus the five year average for the same week will be around 10.8 million barrels.

Distillate fuel likely drew by about 1.7 million barrels as economy sensitive diesel fuel implied demand continues to remain steady with agriculture demand for the harvest along with distillate fuel exports which have increased as the arb is still open and the US dollar is weak versus most major currencies that are likely recipients of US exports of distillate fuel. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely be about 4.6 million barrels below last year while the overhang versus the five year average will drop to 27.1 million barrels. With the US dollar likely to remain on the defensive and with the situation in France likely to impact the balances in Europe for many months into the future demand for gasoil into Europe (from the US and elsewhere) should remain strong over the next several months further helping to reduce the overhang of distillate fuel heading into the winter heating season.

As usual do not overreact to the API data as the EIA data will be released in a few hours. 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 bullish side as total commercial stocks of crude oil and refined products combined are likely to have decreased marginally for the week. However, if the EIA report is in sync with the very bullish API report market participants are likely to push prices up to yet a new level. Just looking at the three main commodities the API reported a combined decline of 14.8 million barrels which is very substantial. Today’s EIA report should be very interesting and with minimal macro data hitting the streets it could be a price drive.

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