Oil drops 2.5% as commodities selloff

Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report that showed a large decline in crude oil stocks along with larger than expected builds in both gasoline and distillate fuel inventories. The API reported a crude oil inventory draw of about 7.5 million barrels even as refinery utilization rates declined by 0.2% to 85.4% of capacity They also showed a strong build in gasoline stocks of about 5.6 million barrels while distillate fuel stocks grew by about 2.2 million barrels as the weather last week in the main heating oil consuming part of the U.S. experienced a bit of a thawing out. 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 could result in another strong push to the downside, especially if the U.S. dollar remains in positive territory as it is as of this writing.

My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report for U.S. oil stocks. I am expecting a modest decline of about 1.2 million barrels of crude oil inventories as refiners continued to manage their yearend inventory levels. If the actual numbers are in sync with my projections, the year-over-year surplus of crude oil would narrow to 10.9 million barrels while the overhang of the five-year average for the same week will also narrow to 24.4 million barrels. The overhang is slowly dissipating in the United States as the direction of stock levels remains supportive for prices.

With runs expected to increase by about 0.3% and with imports expected to increase a bit, I am expecting a modest increase in gasoline stocks. Gasoline stocks are expected to build by about 0.8 million barrels even as refiners continue to focus their attention to the colder than normal winter heating season that has been in play so far. This week the gasoline year over year deficit is projected to widen to around just 4.1 million barrels while the surplus versus the five-year average for the same week will narrow to about 2.4 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 and the sudden fundamental surge in prices discussed above may dissipate sooner than later.

Distillate fuel likely built by about 0.3 million barrels as economy sensitive diesel fuel implied demand continues to remain steady and as last week's winter heating season experienced a bit of a warming spell. However, the latest six to 10 day and eight to 14 day NOAA temperature reports are still showing a large portion of the United States likely to be engulfed in colder than normal temperatures for the first half of January. With the temperature forecasts projected to be colder than normal for the next few weeks, 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 2.2 million barrels above last year while the overhang versus the five-year average will be around 20.9 million barrels.

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