Oil retreats after concerted government moves

Not only did oil prices decline on the day, most all risk asset markets were lower in what was clearly a risk-off trading session. Global equity markets fell for the second day in a row as shown in the EMI Global Equity Index table below. The Index is down by 0.9% on the week so far narrowing the year to date gains to 14.3%. The market sell-off was initiated by a growing concern that the Chinese economy is slowing. Comments by BHP that iron ore use by China was going to be flat at best this year sent a strong signal to the markets that industrial production may be declining and as such the Chinese economic machine. None of this is new news as two weeks ago the Premier of China announced that they were lowering their GDP target for 2012 from 8% to 7.5%. For the moment the global equity markets are a bearish price driver for oil and most all of the traditional commodity markets. It should also be noted that the more than 2% decline in oil prices today can be attributed to the comments discussed above as well as the growing concerns over China because it is the main oil demand growth engine in the world.


The API report showed a surprise decline in crude oil stocks but a smaller than expected draw in gasoline inventories along with a surprise build in distillate fuel stocks. The API reported a modest draw (of about 1.3 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports decreased even as refinery run rates declined by 0.4%. The API reported a modest draw in gasoline stocks and a surprise build in distillate stocks versus an expectation for a more seasonal draw in inventories of both refined products.


The report is neutral with a bias to the bullish side. That said the changes since the report was issued may not be from the API inventory report as prices are higher across the board and are being driven by the movement of the macro indicators and a bit of a rebound from yesterday's strong sell-off. The market remains tied to the evolving situation in the Middle East that has been unfolding along with what is going on in China and Europe. The API reported a draw of about 1.3 million barrels of crude oil with a draw of 0.2 million barrels in Cushing and a build of about 0.4 million barrels in PADD 2, which is neutral for the Brent/WTI spread. On the week gasoline stocks declined by about 1.4 million barrels while distillate fuel stocks increased by about 0.6 million barrels. 

My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed inventory report this week with a modest build in crude oil and a decline in both gasoline and distillate fuel stocks along with a modest decrease in refinery utilization rates. I am expecting a draw in gasoline inventories as well as a modest decline in distillate fuel stocks even as winter like weather was absent for most of the US during the report period...in particular the east coast. I am expecting crude oil stocks to increase by about 2.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 3.3 million barrels while the overhang versus the five year average for the same week will widen to around 9.1 million barrels.

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