Oil driven by fundamentals; economic reports

The API report was simply bearish and not in directional sync with the range of expectations. Crude oil showed a surprise build compared to expectations for a modest draw. Gasoline showed a larger than expected build in inventory while distillate fuel also built versus an expectation for a smaller build. The API reported a build (of about 4.3 million barrels) in crude oil stocks versus an industry expectation for a modest draw as crude oil imports increased while refinery run rates increased by 0.9%. The API reported a modest build in distillate and in gasoline stocks.

The API report is bearish with many participants now looking at this morning's EIA inventory report with much more interest. The oil market is stable heading into the U.S. trading session and ahead of the EIA oil inventory report at 10:30 AM today. 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 4.3 million barrels of crude oil with PADD 2 stocks increasing by 1.1 million barrels. On the week gasoline stocks increased by about 2.3 million barrels while distillate fuel stocks increased by about 2.2 million barrels. 

With geopolitics less of an issue or price driver than it was the last few weeks the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.

My projections for this week’s inventory report are summarized in the above table. I am expecting the U.S. refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest draw in crude oil inventories, a build in gasoline and in distillate fuel stocks as the weather was mostly warmer than normal over the east coast during the report period. I am expecting crude oil stocks to decrease by about 2.3 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 33.4 million barrels while the overhang versus the five-year average for the same week will come in around 38.7 million barrels.

I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is still pumping and refinery maintenance programs in the region are mostly over. This will be bearish for the Brent/WTI spread in the short term as the spread is currently trading at a relatively high premium to Brent and very near the highs recently hit. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Jan Brent/WTI spread still trading around the $22/bbl level as of this writing. The narrowing of the spread should begin to ease once the North Sea returns to a more normal production level and the situation in the Middle East quiets down.

With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.8 million barrels which would result in the gasoline year over year deficit coming in around 1.1 million barrels while the surplus versus the five year average for the same week will come in around 4.2 million barrels.  

Distillate fuel is projected to increase by 1.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 24.8 million barrels below last year while the deficit versus the five year average will come in around 30 million barrels.

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