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Oil prices are mixed in overnight trading after an uneventful American Petroleum Institute (API) inventory report yesterday afternoon and ahead of this morning’s Energy Information Administration (EIA) oil report. The most interesting change since yesterday was the March heating oil (HO) contract moving back above the key $3.09 technical support level after dropping below it on an intraday basis. This morning the HO contract is once again adding value as another round of cold weather hits the eastern half of the United States.

From a technical perspective all of the commodities in the oil complex hit a top several days ago and have been drifting lower since peaking after a long run to the upside that began in early February. At the moment market participants are looking forward to the upcoming spring refinery maintenance season in both the US and Europe and the implications it will have on overall crude oil supply and demand balances and whether or not the destocking of Cushing inventories will result in a surplus of crude oil in the Gulf Coast.

As of last week’s EIA report crude oil stocks in PADD 3 are above both last year and the five-year average for the same week. In my view the reason why the Gulf Coast surplus is still only slowly building is due to the interruption in crude oil imports over the last several weeks due to fog problems in and around the Houston Ship Channel and the fact that refinery utilization rates are still running above last year at this time as well as above the five year average. The maintenance season is only just getting started.

The April Brent/WTI spread is back to trading with a $7/bbl handle after spending part of yesterday back above the resistance area of $8 to $8.25/bbl. The spread is continuing to slowly work it’s toward more normal historical relationships that existed prior to the huge surplus of crude oil forming in the Cushing area. On a continuation chart basis the spread peaked back on January 9th at around $15.30/bbl and has since narrowed by $8.07/bbl or 52.8%.

The likelihood of another surplus forming in the Cushing area since the start of the Keystone Gulf Coast pipeline is rather low. Also as long as the U.S. Gulf Coast continues to absorb the majority of the crude oil from the Cushing area the spread should continue to narrow. If a surplus of crude oil does form in the Gulf (I think it will at some point) the narrowing trend could be interrupted temporarily until the refinery maintenance season ends prior to the start of the summer driving season. I am expecting the spread to settle into the $5.50 to $8/bbl trading range and possibly hit the $5.50/bbl level over the next several months if crude oil balances in the Gulf remain in check.

The U.S. Department of Transportation has issued an emergency order requiring that all shippers test crude oil to ensure it is properly classified before being transported by rail and prohibiting the use of the “weakest” type of tank car to move crude by rail.

While the agency specifically referenced the Bakken in its press release, the order, which goes into immediate effect, requires that shippers “within the United States” must ensure the product is properly tested and classified in accordance with federal safety regulations. The order also requires that all Class III crude oil shipments be designated “Packing Group I or II,” which is considered hazardous material and requires the use of a more robust tank car. Packing Group III, a lower-risk designation, will not be accepted until further notice, according to the order. This requirement ensures that crude oil will be transported in, at a minimum, a DOT Specification tank car.

The order also imposes civil penalties of up to $175,000 for each violation or for each day a shipper is found to be in violation. In addition, it provides a “right to review” that allows the filing of a petition seeking relief, which must be filed within 20 calendar days of the date of the order.

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