Oil taking trading cues from dollar and Chinese economy

The API report showed a surprise across the decline in oil inventories this week versus expectations for builds in both crude oil and gasoline and a much more modest draw in gasoline. The API reported a modest draw (of about 1 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports decreased marginally while refinery run rates also increased by 0.6%. The API reported a large draw in gasoline stocks and a large draw in distillate stocks versus an expectation for a more seasonal draw in gasoline and a small build in distillate fuel inventories.

The report is bullish across the board especially if the EIA report is in sync with the API report. The market has not reacted strongly in overnight trading.  The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out tomorrow. The API reported a draw of about 1.0 million barrels of crude oil with a build of 1.0 million barrels in PADD 2 and a build of 0.6 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread. On the week gasoline stocks decreased by about 3.6 million barrels while distillate fuel stocks decreased by about 3.6 million barrels. 

At the moment oil prices are still being mostly driven by the direction of the euro and the US dollar as well as by a view that China's economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West have been easing as another meeting is scheduled for May.  As such we may see more market participants starting to pay attention to this week's round of oil inventory data suggesting that this week's oil inventory reports could also start to impact price direction. This week's oil inventory report could move to being a primary price driver especially if the actual EIA data is noticeably outside of the range of market expectations for the report.

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, a small decline in gasoline inventories and a modest decline in distillate fuel stocks along with a small increase in refinery utilization rates. I am expecting a draw in gasoline inventories and a build in distillate fuel stocks as the summer planting season is still in play (increasing the demand for diesel fuel) while the heating oil demand is dissipating. I am expecting crude oil stocks to increase by about 1.5 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 13.6 million barrels while the overhang versus the five year average for the same week will widen to around 23.7 million barrels.

Even with refinery runs expected to increase by 0.2% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 0.8 million barrels which would result in the gasoline year over year surplus coming in around 5.1 million barrels while the deficit versus the five year average for the same week will come in around 21.5 million barrels.  

Distillate fuel is projected to increase by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 18.9 million barrels below last year while the deficit versus the five year average will come in around 2.8 million barrels.

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