Oil inventories build while refinery utilization drops

The US dollar is continuing to decline but only modestly and more as a result of the euro and other major currency pairs firming as the fundamentals of the US economy should provide a floor on the value of the US dollar. At the moment the direction of the US dollar is mildly positive for oil and commodity prices. This afternoon the market will be looking for any signs of a change in the US Central Bank's monetary policy when the results of the FOMC meeting are announced at 2:15 PM EST. The consensus is expecting no change in interest rates, a continuation of QE2 and guidance that suggests the US economy is still only growing slowly. Any deviations from the expectations will likely result in a quick reaction in the external markets...equities and currencies.

Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report. The API reported builds for crude oil and gasoline but a surprisingly large draw in distillate stocks. The API reported a crude oil inventory build of about 2.1 million barrels as refinery utilization rates declined strongly by 3.2% to 79.7% of capacity. The API also reported a big increase in crude oil imports of about 1 million barrels per day. They also showed a strong build in gasoline stocks of about 1.7 million barrels while distillate fuel stocks declined by about 5 million barrels as the weather last week in the main heating oil consuming part of the US was colder than normal. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish as prices have increased in overnight trading. In fact if today’s EIA report is in sync with the API report, it could result in a modest push to the upside, especially if the US dollar and equity markets remain supportive for oil prices.

My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report for US oil stocks. I am expecting a strong build of about 1.5 million barrels of crude oil inventories mostly as a result of the restart of the Alaska pipeline as well as a modest increase in imports. If the actual numbers are in sync with my projections the year-over-year surplus of crude oil would widen to 6.7 million barrels while the overhang versus the five-year average for the same week will also widen to 18.4 million barrels.

With runs expected to only increase by about 0.1% 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 2.1 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 surplus is projected to widen of around 2.3 million barrels while the surplus versus the five-year average for the same week will widen to about 9.1 million barrels. Gasoline inventories have turned the corner after going through a decent destocking phase. Gasoline stocks will have built for four weeks in a row if my projection for another build this week is in line with the actuals.

Distillate fuel likely built by decline modestly by 0.7 million barrels mostly as a result of the colder than normal temperatures we have been experiencing in the eastern half of the US. The latest short term temperature reports are still showing persistent cold temperatures along the eastern half of the US with extremely bitter cold weather hitting this week in many of the large population centers in the eastern half of the US. In fact one private forecaster (Accuweather) is suggesting that cold winter weather may last a lot longer than originally anticipated. 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 8 million barrels above last year while the overhang versus the five-year average will be around 23.9 million barrels.

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