In my view not much has changed in the overall trading pattern of crude oil. WTI and Brent are still trading in the trading range that has been in place since mid-March. I expect the crude oil market to remain in the $102 to $106/bbl range for WTI and the $117 to $122/bbl for Brent for the next several weeks and likely until the outcome of upcoming May 23rd Iran/West meeting. The risk of a supply disruption from the Middle East is low while diplomacy is in motion and for the moment there is little likelihood of an oil demand push higher in prices. The main feature I expect to continue is the slow narrowing of the Brent/WTI spread as the prospect of oil moving out of the mid-West becomes a reality in about two weeks or so.
The API report showed a build in crude oil that was within the expectations but a much larger than expected decline in gasoline stocks and a surprise draw (and a large one) in distillate fuel inventories. The API reported a modest draw (of about 2 million barrels) in crude oil stocks and within the expectations as crude oil imports increased modestly even as refinery run rates also increased by 1.0%. 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 for refined products and neutral to bearish for crude oil. The market has not reacted strongly in overnight trading but has been drifting lower for crude oil. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. The API reported a build of about 2 million barrels of crude oil with a build of 0.5 million barrels in PADD 2 and a build of 1.1 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread (although the spread is still in narrowing mode so far this morning). On the week gasoline stocks decreased by about 3.9 million barrels while distillate fuel stocks decreased by about 4.2 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 build 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 2.1 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 12 million barrels while the overhang versus the five year average for the same week will widen to around 24.9 million barrels.