Oil gains on short covering, Chinese inflation, Midwest flooding

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Oil prices continued to gain ground on Tuesday on a combination of additional short covering, an increase in China's crude oil imports by 3% for April, and concerns over the Mississippi flood possibly reaching the Gulf Coast and impacting refineries in that region (especially Louisiana). WTI has now regained about $9/bbl after hitting an intraday day low of $94.50/bbl last Thursday...also a key technical support level. The US dollar short covering rally seems to be losing some of its steam and as such the selling pressure from last week is starting to look like it may be over for the moment.

Overnight China released it latest on inflation. The CPI came in at 5.3% (versus an expectation of 5.2%) or a mild slowing for the month of April suggesting that this meteoritic economy may be finally starting to see some impact from the aggressive tightening that has been underway by the Chinese government for about a year. On the other side of the equation wholesale inflation as measured by the PPI came in at 6.8% versus an expectation of 7.3%. So on both accounts better than expected and enough to possibly indicate that China could be heading for a soft landing. For now the news out of China has been viewed by the market as the Chinese government may not ratchet up its inflation fighting and as such China's economy is likely to still grow at a decent pace keeping their voracious appetite for oil and other commodities in place.

Last night the API released their weekly oil inventory report which I would view as biased to the bearish side...except for gasoline. They reported a build of 2.9 million barrels of crude oil, a build of about 0.6 million barrels of distillate fuel and a surprise draw of about 1.8 million barrels of gasoline. At the moment the market is not reacting to the API report as the more widely followed EIA report will hit the media airwaves in a few hours. I am projecting the following for oil stocks for this week:

  • Crude oil a build of 1.1 million barrels
  • Gasoline a draw of 0.5 million barrels
  • Distillate fuel a build of 1.2 million barrels
  • Refinery runs increased by 0.3%

If my projections are in sync with the actual results I would expect the market to view the outcome of the reports with a downside bias. Of note last week there was a very large build in total commercial stocks beyond simply adding up the combination of crude oil, gasoline and distillate fuel suggesting a buildup in intermediate of unfinished products. If that was the case the risk to this week’s EIA oil inventory report could be a larger than projected build in finished products and one that would result in the report turning out to be a bit more bearish than it is projected to be.

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