Oil inventories in driver’s seat as geopolitics secondary

Yesterday's API report showed a much larger than expected build in crude oil, a larger than expected draw in distillate fuel and decline in gasoline stocks, which was mostly within the market expectations. Total crude oil stocks increased by 5.6 million barrels versus an expectation for a smaller build. Gasoline showed a draw in inventory as did distillate fuel stocks. The API reported a 5.6 million barrel build in crude oil stocks versus an industry expectation for a smaller build of around 1 million barrels as crude oil imports increased while refinery run rates decreased strongly by 2.1%. The API reported a modest draw in distillate and in gasoline stocks.

The API report was mostly neutral wit support for heating oil. The oil market is mostly mixed heading into the US trading session and ahead of the EIA oil inventory report at 11 AM today. The market is usually 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 PADD 2 stocks were unchanged while Cushing stock increased by 0.3 million barrels. On the week gasoline stocks decreased by about 0.9 million barrels while distillate fuel stocks decreased by about 1.7 million barrels. 

My projections for this week’s inventory report are summarized in the following table. I am expecting the U.S. refining sector to decrease as more refineries move into maintenance mode. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel — as the weather was winter like over the east coast — and a draw in gasoline stocks during the report period as refinery runs continue to decline ahead of US maintenance season. I am expecting crude oil stocks to increase 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 32.7 million barrels while the overhang versus the five year average for the same week will come in around 38.3 million barrels.

I am expecting a draw in crude oil stocks in Cushing, Ok and in PADD 2 even as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be bullish for the Brent/WTI spread. However, as discussed above the shutdown of the Brent pipeline will likely offset any decline in Cushing stocks (unless of course if the decline is significant). Currently the spread is still trading well above the level it was trading at just prior to the Seaway pipeline announcement.

With refinery runs expected to decrease by 0.2% I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.8 million barrels which would result in the gasoline year over year deficit coming in around 1.8 million barrels while the surplus versus the five year average for the same week will narrow to around 0.5 million barrels.

Distillate fuel is projected to decrease by 1.0 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 16.3 million barrels below last year while the deficit versus the five year average will come in around 17.2 million barrels.

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