Oil sees relief rally after API release

With a light economic calendar today the EIA inventory report could wind up being the main price driver for oil prices today and possibly for the rest of the week. Heading into today's session the oil market is oversold and a short covering rally should not be a surprise, especially if this morning's inventory report is the least bit bullish.. My projections for this week’s inventory reports are summarized in the following table. I am expecting another bearish report with an across the board build in all components of the complex as well as in total combined commercial stocks of crude oil and refined product inventories. I am even expecting the second build in gasoline inventories in a row. I am expecting crude oil stocks to build by about 1.1 million barrels. If the actual numbers are in sync with my projections the year-over-year surplus of crude oil would come in around 8.7 million barrels while the overhang versus the five-year average for the same week will widen to 21.8 million barrels.

Even with refinery runs expected to increase by only about 0.2% I am expecting a build in gasoline stocks as demand likely slipped and imports increased on the week. Gasoline stocks are expected to build by about 0.9 million barrels which would result in the gasoline year-over-year deficit narrowing to 15.1 million barrels while the deficit versus the five-year average for the same week will also narrow to 1.7 million barrels. All eyes will be focused on the gasoline number this week after last week's surprise build in stocks for the first time in about three months. Gasoline demand is definitely on the defensive as last week's implied demand number was even lower than it was for the same time period during the heart of the recession two years ago. Although oil prices have declined on the financial and futures side the average retail gasoline price in the US is still only about $0.056/gal below the psychological $4/gal that 62% of American consumers indicated that at this level they would cut back on their driving. So far they have and it is likely to continue. With falling demand and refiners slowly raising run rates after the maintenance season, I would expect gasoline stocks to build for the next three or four weeks and thus catch the attention of the gasoline sellers.

Distillate fuel is projected to increase modestly by 0.8 million barrels on a combination of minimal weather demand as well as an increase in production. The weather forecasts are a neutral for heating oil especially for this time of the year. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 7.7 million barrels below last year while the overhang versus the five year average will be around 17.4 million barrels.

Net result the US continues to remain well supplied but with the below normal inventory levels in gasoline stocks the fundamentals are still mildly supportive, but this could be changing for gasoline as discussed above.

As usual do not overreact to the API data which will be released later today as more often than not it is not in line with the more widely followed EIA data. If the EIA report is within the projection I would expect the market to view the results as bearish as total commercial stocks of crude oil and refined products combined are likely to have increased versus last week. However, as mentioned above, if it is in agreement with the API data it will be viewed as bullish.

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