Oil inventories take back seat to global economy

The API report showed a modest draw in crude oil versus an expectation for a draw and a build in gasoline stocks along with a build in distillate fuel inventories. The API reported a draw (of about 1.8 million barrels) in crude oil stocks and within the expectation range as crude oil imports decreased while refinery run rates increased by 1.5%. The API reported a modest build in gasoline stocks. They also reported a modest build in distillate stocks versus an expectation for a more seasonal build in distillate fuel inventories.

The report is bearish for gasoline, neutral for crude oil and bearish for distillates. The market has not reacted strongly in overnight trading but has been stabilizing for all commodities in the complex mostly due to short covering after yesterday's strong sell-off.  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 at 10:30 AM. The API reported a draw of about 1.8 million barrels of crude oil with a build of 2.9 million barrels in PADD 2 and a build of 0.929 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread. On the week gasoline stocks increased by about 1.4 million barrels while distillate fuel stocks increased by about 1.8 million barrels. 

At the moment oil prices are still being mostly driven by the events discussed above along with 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 in June.  As such we may not see much of a reaction from market participants to this week's round of oil inventory data as the macro risk off momentum is currently the main concern of al market players. This week's oil inventory report will likely be a background price catalyst unless the actual outcome is significantly different from the market projections.

My projections for this week’s inventory reports are summarized in the following table. I am expecting the industry to embark on an aggressive campaign of converting a portion of the surplus crude that has been building for the last several months into refined products... in particular gasoline and distillate fuels whose inventories have been in decline.  I am expecting a draw in crude oil inventories and a build in both gasoline and distillate fuel stocks as the summer planting season is winding down (decreasing the demand for diesel fuel) while heating oil demand is over. I am expecting crude oil stocks to decrease 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 14.2 million barrels while the overhang versus the five year average for the same week will widen to around 34.1 million barrels.

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