Oil on the defense after EIA cuts demand projection

Tuesday's API report was bearish for crude oil and gasoline but supportive for heating oil. There was a surprisingly larger than expected build in crude oil stocks (for the third week in a row) along with a surprise build in gasoline inventories. Total crude oil stocks increased by 5.1 million barrels versus an expectation for a smaller build. Gasoline showed a build in inventory while distillate fuel stocks declined. The API reported a 5.1 million barrel draw in crude oil stocks versus an industry expectation for a modest build of around 1.5 million barrels as crude oil imports increased modestly while refinery run rates also increased by 2.1%. The API reported a modest draw in distillate fuel inventories and a build in gasoline stocks.

The API report was mixed with a bearish bias. The entire oil complex is in negative territory so far this morning heading into the EIA oil inventory report to be released at 10:30 AM EST 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 built by around 2.3 million barrels while Cushing stock increased by 0.9 million barrels. On the week gasoline stocks increased by about 2 million barrels while distillate fuel stocks decreased by about 1.3 million barrels. 

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was colder than normal over the east coast during the report period... and a draw in gasoline stocks as refinery runs remain at below normal levels during the maintenance season.

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 24.9 million barrels while the overhang versus the five year average for the same week will come in around 38.9 million barrels.

I am expecting a modest build in crude oil stocks in Cushing, Ok and in PADD 2 as the Seaway pipeline has been has been running at constrained levels for most of the report period.  In addition the shutdown of the Pegasus pipeline will likely impact this week’s report as the line was shut on Friday, March 29 or the beginning of the period for this week’s EIA inventory snapshot. This will be bullish for the Brent/WTI spread and should serve as a catalyst to keep the short covering rally going.

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