Oil focuses on inventories as fiscal cliff negotiations continue

With geopolitics less of an issue or price driver than it was the last month or so 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 following table. I am expecting the US 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 0.9 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 37.6 million barrels while the overhang versus the five year average for the same week will come in around 45.6 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 $20/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, the situation in the Middle East quiets down and the expanded capacity of the Seaway pipeline starts flowing in January.

With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.5 million barrels which would result in the gasoline year over year deficit coming in around 0.2 million barrels while the surplus versus the five year average for the same week will come in around 6.6 million barrels.  

Distillate fuel is projected to increase by 1.1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 22.3 million barrels below last year while the deficit versus the five year average will come in around 26.9 million barrels.

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