Oil falls after facing Fed tapering reality, rising inventories

The Fed forces oil back to reality

Oil bulls were living in a Fed paradise. Somehow up until the Fed meeting the market must have believed that Fed Chairman Ben Bernanke wasn't serious about that taper thing, but they found out that he was serious, very serious. Ben broke the bull's hearts when he said that it would be "appropriate to moderate the monthly pace of purchases later this year" as long as the economy grows as expected.

Oil bulls drove the oil market toward the high of the year despite a glut of oil supply and signs of weakening global demand on the unfettered belief that the Fed would not dare take away that stimulus punch. Instead they got a Hawaiian Punch.  They thought that even if the Fed talked about tapering, that was not like they were raising rates. The truth is that in a world of negative real rates they really are. That is not to say that the Fed won't be wildly accommodative, because they will be, but not as accommodative as they were when they were purchasing $80 billion of paper each and every month.

The Great Fed Exodus or exit strategy has begun and we know it will also temper oil demand and increase demand growth fears.  Those fears are being extenuated by data out of China overnight and fears of a burgeoning credit crunch in the China banking system rising concerns of an emerging crisis in the Chinese economic miracle.  Not only did the Chinese Purchasing Manager Index hit a nine-month low, word is that credit in China is freezing up, which might be the start of a much bigger problem. The Wall Street Journal reports that "A cash squeeze gripping China's financial markets is beginning to trickle into the broader economy, as bank executives warn of higher interest rates and more-cautious lending and scramble to raise funds by offering higher returns to investors." Do you need another reason to be short oil?

Ok then how about the oil inventory? Not really bullish and even bearish against the backdrop of a more stingy Fed and an unfolding economic crisis in China. The Energy Information Administration reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 0.3 million barrels from the previous week. At 394.1 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 0.2 million barrels last week and are also above the upper limit of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 0.5 million barrels last week and remained in the lower half of the average range for this time of year. Propane/propylene inventories increased by 3.5 million barrels from last week's revised total of 49.7 million barrels, and are in the upper half of the average range. Total commercial petroleum inventories increased by 6.8 million barrels last week.

U.S. crude oil refinery inputs averaged over 15.5 million barrels per day during the week ending June 14, 2013, 294 thousand barrels per day above the previous week's average. Refineries operated at 89.3 percent of their operable capacity last week. Gasoline production decreased last week, averaging 9.1 million barrels per day. Distillate fuel production decreased slightly last week, averaging about 4.7 million barrels per day. U.S. crude oil imports averaged over 8.4 million barrels per day last week, up by 586 thousand barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged over 7.8 million barrels per day, 1.3 million barrels per day below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 556 thousand barrels per day. Distillate fuel imports averaged 87 thousand barrels per day last week.

Total products supplied over the last four-week period have averaged 18.4 million barrels per day, down by 1.5 percent from the same period last year. Over the last four weeks, motor gasoline product supplied has averaged over 8.8 million barrels per day, down by 0.4 percent from the same period last year. Distillate fuel product supplied has averaged 3.9 million barrels per day over the last four weeks, up by 8.5 percent from the same period last year. Jet fuel product supplied is 3.4 percent lower.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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