Crude oil and byproduct supply disparity is leveling off

The tropics are continuing to be in active mode as there are still three tropical storms working at the moment with one evolving in the Gulf of Mexico, one off of the coast of West Africa and one that has just been upgraded to a Tropical Depression...TD9... that is heading for the Caribbean. TD9 is now projected to strengthen to hurricane status by the second half of this week and based on the current projected path by the National Hurricane Center should be over Cuba by the weekend. If it continues on this path it could wind up in the Gulf of Mexico sometime next week.  The weather pattern that is already in the Gulf has a 20% chance of strengthening to a tropical cyclone over the next 48 hours while the pattern off of Africa now has a 60% chance of strengthening. As it looks at the moment none of these storms are an immediate threat to the oil and Natural Gas rich area of the U.S. Gulf of Mexico but that could change quickly. However, as I said last week the tropics now must be on everyone's radar and monitored on a daily basis as the activity level is picking up.

The API report showed another surprisingly large draw in crude oil stocks but with a build in gasoline and a draw in distillate fuel stocks. The API reported a draw (of about 6 million barrels) in crude oil stocks vs. an expectation for a modest build as crude oil imports decreased significantly while refinery run rates also decreased modestly by 0.5%. The API reported a strong draw in distillate stocks. They also reported a modest build in gasoline stocks within the expectation for a modest build in gasoline inventories.

The report is mixed. The market has not reacted much in after hours trading with prices within Monday's closing range ahead of the EIA oil inventory report at 10:30 AM on Tuesday.  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 6 million barrels of crude oil with a minor draw of 0.005 million barrels in Cushing, Ok and a draw of 1.9 million barrel draw in PADD 2 which is bearish for the Brent/WTI spread. On the week gasoline stocks increased by about 0.9 million barrels while distillate fuel stocks decreased by about 1.0 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 and one or two of the major central banks will come to the rescue. The tensions evolving in the Middle East between Iran and the West seem to be moving more into the foreground as the rhetoric between Israel and Iran has ratcheted up several levels over the last few weeks. However, with the low level of trading activity and light economic calendar we could see a more pronounced reaction from market participants to this week's round of oil inventory data even thought the macro risk of the markets is still the main concern of all market players. This week's oil inventory report could likely be a primary price catalyst especially if the actual outcome is significantly different from the market projections.

My projections for this week’s inventory report are summarized in the following table. I am expecting the U.S. refining sector to throttle back runs this week, most likely driven by the unannounced refinery shutdowns over the last week or so. I am expecting a modest build in crude oil inventories a draw in gasoline and a seasonal build in distillate fuel stocks as the summer driving season is starting to wind down. 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 15.4 million barrels while the overhang vs. the five-year average for the same week will come in around 27.8 million barrels.

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