Oil dependent on economic growth and inflation

Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report for the third week in a row. The API showed only a modest decline in crude oil stocks and builds in both gasoline and distillate fuel inventories. The API reported a crude oil inventory draw of about 1.4 million barrels as refinery utilization rates remained unchanged at 81.6% of capacity They also showed a strong build in gasoline stocks of about 2.4 million barrels while distillate fuel stocks also increased strongly by about 2.0 million barrels during a period of time when the weather in the main heating oil consuming part of the US was the coldest of the season so far. The results of the API report are summarized in the following table. So far the reaction to the API report has been bearish as prices have continued to decline in overnight trading. In fact if today’s EIA report is in sync with the API report, it is likely to result in a strong round of profit taking selling especially if the US dollar remains in positive territory.

My projections for this week’s EIA inventory reports are summarized in the following table. I am expecting a mixed report for US oil stocks. I am expecting a modest decline of about 2.5 million barrels of crude oil inventories based on a modest increase in refinery utilization rates of about 0.3% as refineries continue to return from fall maintenance. If the actual numbers are in sync with my projections the year over year surplus of crude oil would narrow a bit to 21 million barrels while the overhang for the five year average for the same week will also narrow to 31.9 million barrels. The overhang is slowly dissipating in the US as the direction of stock levels remains supportive for prices.

With runs expected to increase by 0.3% and with imports slowing I am expecting a modest increase in gasoline stocks. Gasoline stocks are expected to build by about 0.5 million barrels even 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 deficit is projected to narrow to around the 2.8 million barrel level while the surplus versus the five-year average for the same week will widen to about 8.3 million barrels. Gasoline inventories have staged a decent recovery (recovery defined as destocking) as the overwhelming surplus situation that persisted throughout the entire summer driving season has virtually been eliminated with the overhang versus the five-year average very manageable at this point in time. However, over the last few weeks gasoline stocks have once again began to build suggesting that the overhang may linger longer than expected.

Distillate fuel likely drew by about 1.1 million barrels as economy sensitive diesel fuel implied demand continues to remain steady and as the start of the winter heating season finally gets underway. The latest 6 to 10 day and 8 to 14 day NOAA temperature reports are still showing a large portion of the eastern half of the US likely to be engulfed in colder than normal temperatures for the rest of December. The current forecasts are colder than what was projected about three weeks or so ago and this has given the heating oil bulls a bit of support. With the temperature forecasts projected to be colder than normal we could very well see HO net withdrawals starting to accelerate in the not too distant future. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 5.3 million barrels below last year while the overhang versus the five-year average will widen to 22.3 million barrels.

As usual do not overreact to the API data as the EIA data will be available in a few hours. If the EIA report is within the projection I would expect the market to view the results as neutral as total commercial stocks of crude oil and refined products combined are likely to have decreased for yet another week. However, if the EIA report follows the API data this morning’s report will be viewed very bearishly as it would suggest that the destocking of inventories seen over the last month or so could be coming to an end.

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