Oil gains as violence continues in Middle East

Late yesterday afternoon the API released their latest inventory assessment. The API report was mixed but biased to the bullish side. The API reported a crude oil inventory build of about 1 million barrels even as refinery utilization rates increased by 0.3% to 82.6% of capacity. The API also reported a modest increase in crude oil imports which offset the increase in refinery run rates. PADD 2 stocks declined modestly by about 450,000 barrels after the previous API report showed a huge decline in stocks in that region. They also showed a huge draw in gasoline stocks of about 7.9 million barrels while distillate fuel stocks declined by about 0.6 million. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish for refined products as prices have increased in overnight trading but the vast majority of the gain in crude oil prices is more related to the turmoil in Libya and the Middle East. If today’s EIA report is in sync with the API report I would view it as bullish.

With the events well priced into the market already this week's round of inventory reports may matter as to the short term direction of oil prices as the more widely watched EIA data hits the media airwaves this morning. My projections for this week’s inventory reports are summarized in the following table. I am expecting another mixed report with a modest build in total commercial stocks of crude oil but a decline in refined products inventories as refinery runs likely declined marginally on the week. I am expecting crude oil stocks to build by about 1.9 million barrels. If the actual numbers are in sync with my projections the year-over-year surplus of crude oil would come in at just 1.2 million barrels while the overhang versus the five-year average for the same week will be about 15 million barrels.

With runs expected to decrease by about 0.2% and with imports expected to hold steady I am expecting a decent decline in gasoline stocks. Gasoline stocks are expected to draw by about 1.8 million barrels which would result in the gasoline year-over-year surplus switching to a deficit of around 1.4 million barrels while the surplus versus the five-year average for the same week will narrow to about 3.1 million barrels.

Distillate fuel is projected to decrease modestly by 1.2 million barrels on a combination of some weather demand as well as a decline in production. The latest NOAA weather forecasts are now showing a significant portion of the US expected to experience below normal temperatures for the next several weeks. The forecasts are a positive for heating oil especially after the last several weeks of bullish inventory reports.

In spite of the forecast for cooler temperatures, it is now spring and low temperatures are not nearly as severe as they are in the heart of the winter and as such I do not expect any large increase in heating oil consumption that would result in a very above normal draw from inventory. If so the inventory building season may get a bit of a jumpstart in starting to replace the volume consumed this year. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 6 million barrels above last year while the overhang versus the five-year average will be around 23.1 million barrels.

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