Oil inventories become primary as Middle East tensions ease

The API report showed modest build in crude oil that was within the range of expectations but another much larger than expected decline in gasoline stocks and another small draw in distillate fuel inventories. The API reported a build (of about 1.5 million barrels) in crude oil stocks bit within the expectation range as crude oil imports decreased slightly as did refinery run rates which decreased by 0.1%. The API reported a large draw in gasoline stocks which was mostly on the West Coast with gasoline actually building east of the Rockies. They also reported a small draw in distillate stocks versus an expectation for a more seasonal build in distillate fuel inventories.

The report is bullish for gasoline and neutral for crude oil and distillates. The market has not reacted strongly in overnight trading but has been drifting lower for all commodities in the complex.  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 1.5 million barrels of crude oil with a build of 0.5 million barrels in PADD 2 and a build of 0.5 million barrels in Cushing, Okla., which is bullish for the Brent/WTI spread. On the week gasoline stocks decreased by about 4.5 million barrels while distillate fuel stocks decreased by about 0.2 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 the global economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West have been easing as another meeting will take place tomorrow (see above for more details).  As such we expect more market participants 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 an across the board build in inventories this week with a modest build in crude oil, a modest build in gasoline inventories and a small build in distillate fuel stocks along with an increase in refinery utilization rates. I am expecting a build in gasoline inventories and a build in distillate fuel stocks as the summer planting season is winding down (decreasing the demand for diesel fuel) while the heating oil demand is over. I am expecting crude oil stocks to increase by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 11.7 million barrels while the overhang versus the five year average for the same week will widen to around 28.8 million barrels.

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