Bearish crude fundamentals belie bullish forecast by banks

Even with refinery runs expected to increase by about 1% 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 0.4 million barrels which would result in the gasoline year over year deficit hovering near the 15.3 million barrel mark while the deficit versus the five year average for the same week will widen to 3.0 million barrels. All eyes will be focused on the gasoline number once again this week after last week's surprise build in stocks for the second week in a row after steady declines for about three months. Gasoline demand is definitely on the defensive even as last week's implied demand number increased marginally as retailer get ready for the upcoming long holiday weekend in the US. Although oil prices have declined on the financial and futures side the average retail gasoline price in the US is still only about $0.17/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 raising refinery 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 0.5 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 8.9 million barrels below last year while the overhang versus the five year average will be around 14.5 million barrels.

Net result the US continues to remain well supplied but the deficit versus last year for the main refined products is still mildly supportive but this could be changing if the destocking pattern that has been in place begins to change.

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 projections I would expect the market to view the results as neutral as total commercial stocks of crude oil and refined products combined are likely to have decreased only marginally versus last week. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets and the direction of the USD.

My individual market view is detailed in the table at the beginning of the newsletter. As I have been discussing the market is in a technical consolidation pattern with a low predictive level for the very short term time horizon. Prices remain within the technical triangular or consolidation pattern that has been in place for the last several weeks. The market is still in the emotional phase and currently mired in the wide trading range as I have been discussing for the last week or so. For the short term I am keeping my overall view at neutral and as wells as my bias at neutral until the market breakouts out of the triangular consolidation pattern.

I am maintaining my Nat Gas view at cautiously bearish but keeping my bias to neutral as I still expect Nat Gas prices to make an attempt to test the $4/mmbtu level in the foreseeable future.

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