Continued oil selling shows focus on weak economy

The API reported a surprise crude oil inventory draw of about 3.3 million barrels as refinery utilization rates surged by 0.9% to 86.7% of capacity. The API reported a draw of about 1.4 million barrels of crude oil in PADD 2 with a draw also in PADD 3 even as SPR oil continues to hit the market. Crude oil stocks in the mid-west are not as high as they once were and with this week's increase they are around the level they were at back in the first quarter of this year. They showed a build in inventory for distillate fuel and a larger than expected build in gasoline stocks. The market was expecting a small build in gasoline stocks and only a modest build in distillate fuel inventories this week. On the week gasoline stocks increased by about 2.5 million barrels while distillate fuel stocks were higher by about 1.4 million barrels. The results of the API report are summarized in the following table. So far the market has reacted negatively to the API report...especially for crude oil... as the industry awaits the EIA report later this morning. If today’s EIA report is in sync with the API report I would view it as modestly supportive.

My projections for this week’s inventory reports are summarized in the following table. I am expecting a modestly bearish report with an across the board build in oil stocks. I am expecting a modest build in crude oil stocks as a result oil flowing into the market from the SPR release and even with a small increase in refinery utilization rates. I am expecting a modest build in both gasoline inventories and distillate fuel stocks. I am expecting crude oil stocks to build by about 1.6 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 2.4 million barrels but the overhang versus the five year average for the same week will widen to 20.2 million barrels. My projection risk for crude oil is to the upside as stocks could have actually built more strongly depending on the combination of how much additional oil came from the SPR versus the level of refinery runs in PADD2 and PADD3.

If the inventories are in line with the projections I would expect to see an increase in both PADD 2 and Cushing crude oil stock levels which could potentially impact the Brent/WTI spread. Since peaking and setting another new record several weeks ago the spread has widened again and is back to trading at an atypically high level of about $22.25/bbl premium to Brent.

With refinery runs expected to increase by about 0.2% I am still expecting a modest build in gasoline stocks as demand likely decreased while imports possibly increased. Gasoline stocks are expected to build by about 0.4 million barrels which would result in the gasoline year over year deficit narrowing to around 9.1 million barrels while the surplus versus the five year average for the same week will widen to about 5.0 million barrels. All eyes will be focused on the gasoline number once again this week after last week's surprise decline in stocks for only the second time in months.

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