Oil under pressure as QE3 seen unlikely to boost economy

This week's oil inventory report could be a price catalyst especially if the actual outcome shows a large deviation from the projections. However, any inventory reaction is likely to be short lived as the main event for this week is still likely to be the markets focusing on the macroeconomics as well as the evolving geopolitical situation in the middle east.

My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to still be working its way back to a full return to normal operations from the preemptive shutdowns ahead of Isaac. I am expecting a modest build in crude oil inventories, a build in gasoline and a seasonal build in distillate fuel stocks. 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 comparison for crude oil will now show a surplus of 30.1 million barrels while the overhang versus the five year average for the same week will come in around 40.4 million barrels.

I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading around the $18/bbl premium to Brent level. I am still of the view that the spread will continue the process of normalization over the next 6 months.

With refinery runs expected to increase by 2% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by 0.5 million barrels which would result in the gasoline year over year deficit coming in around 17.3 million barrels while the deficit versus the five year average for the same week will come in around 7.9 million barrels.  

Distillate fuel is projected to increase by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 28.4 million barrels below last year while the deficit versus the five year average will come in around 23.9 million barrels. Exports of distillate fuel are likely to be back to their pre-hurricane levels.

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