Oil complex higher pre-EIA report

The spot WTI (NYMEX:CLJ14) contract was unable to hold onto to gains on Tuesday as it hovered either side of the $100/bbl level for most of the day prior to declining into the close. The opening of the Houston Ship Channel acted as a downside catalyst. The Houston Ship Channel opened to most traffic yesterday afternoon which will resume crude oil flow in and refined products out of the region into the export market. The Channel closure was not long enough to have had much of an impact on refinery operations in the region. There will be a reduction in crude oil imports into PADD 3 in next week’s round of inventory reports.

In overnight trading the oil complex is mostly higher with the WTI contract lagging the rest of the complex after the API reported another much larger than expected build in crude oil stocks of 6.3 million barrels (see below for more details). The surplus of crude oil is growing at an accelerated rate and will continue to grow as the industry starts to throttle back refinery operations for the annual spring maintenance season.

The evolving geopolitics in the Ukraine and elsewhere in the MENA region are still supporting prices in the oil complex in general but at the moment the current fundamentals are still biased to the oversupply side…especially in the United States.

On the economic front not much in the pipeline for today resulting in a quiet start to the trading on the financial side. The main theme circulating in the media airwaves is the possibility of stimulus programs in both China and Europe as both of those economies seems to be back into the slowing mode. In addition comments were floating in Japan that the Bank of Japan has room to do more stimulus if wanted. So as the US continues to slowly reduce its QE3 program the rest of the developed world may possibly begin to pick up the stimulus slack.

Global equities added value again over the last twenty four hours…mostly driven by talk of more stimulus (see above). The EMI Global Equity Index increased by 0.45 percent with the year to date loss narrowing to 4.2 percent. There are now three bourses in the Index in positive territory for the year with Canada still holding the top spot. Even Brazil has been narrowing its losses over the last week or so as its year to date loss is now about half of what it was just two weeks ago. Global equities have been a positive price driver for the oil complex as well as the broader commodity complex.

Wednesday's API report was biased to bearish side as total crude oil stocks increased more than the expectations while refined product inventories were mixed. The build in crude oil is primarily related to the shifting of crude oil from Cushing down to the Gulf especially since the API reported a decline in crude oil imports last week. The API reported a slightly larger than expected draw in gasoline but a surprise build in distillate fuel inventories even after a week of cold winter weather along the eastern half of the US. Total inventories of crude oil and refined products combined were higher on the week.

The oil complex is trading higher as of this writing and 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.

Crude oil (NYMEX:CLJ14) stocks increased by 6.3 million barrels. On the week gasoline stocks decreased by about 2.8 million barrels while distillate fuel stocks increased by about 0.3 million barrels. Refinery utilization rates decreased by 0.1 percent suggesting the spring maintenance season is still only in the early stages of getting started.

The API reported Cushing crude oil stocks decreased within the expectations by 1.0 million barrels for the week. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting another modest build in crude oil stocks as the restocking process continues for the tenth week in a row. I am also expecting a modest draw in gasoline inventories and in distillate fuel last week with refinery run rates decreasing slightly last week.

I am expecting crude oil stocks to increase by about 2.2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 4.6 million barrels while the overhang versus the five year average for the same week will come in around 20.2 million barrels.

I am expecting crude oil inventories in Cushing, Ok., to decrease modestly as outflow from the region declined last week. However, the inflow into Cushing decreased strongly on the week. I would expect the Cushing stock decline to be in the range of about 1 million barrels.

The Keystone Gulf Coast line decreased its pumping rate after steadily increasing for the previous five weeks in a row. Genscape is reported a flow of 239,474 bpd or a decrease of 69,277 bpd compared to the previous week. Last week the Keystone line moved about 1.7 million barrels of crude oil out of Cushing or about 500,000 barrels less than the previous week. This is likely to result in a reduction in the destocking level in this Cushing area in this week’s round of reports.

According to the latest data from Genscape (for more information on Genscape data products visit their website) the pipeline outflow from Cushing decreased modestly even as the Keystone Gulf Coast pipeline decreased its flow rate slightly last week. For the week ending March 21st total net outflow decreased by an average of 25,059 bpd. This was the third week in a row that the outflow out of Cushing decreased. Seaway pipeline averaged 326,978 bpd for the week ending March 21stand is once again above the 300,000 bpd level. The inflow into Cushing decreased strongly by 97,679 bpd with the largest decrease on the Keystone to Cushing line. The Hawthorn pipeline starting flowing again last week after remaining dormant for the last several weeks as rail movements into this area did yet to pick-up last week.

This will bearish for the Brent/WTI spread this week. I am expecting an above normal build of crude oil stocks in PADD 3(Gulf) of over 1.5 million barrels.

With refinery runs expected to decrease by 0.2 percent and with the industry working down its stocks of winter grade gasoline I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.5 million barrels which would result in the gasoline year over year deficit coming in around 2 million barrels while the deficit versus the five year average for the same week will come in around 0.9 million barrels.

Distillate inventories are projected to decrease by 1 million barrels as exports of distillate fuel out of the U.S. Gulf continue while heating demand last week was above normal on colder than normal weather along the east coast. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 10 million barrels below last year while the deficit versus the five year average will come in around 29.9 million barrels.

The following table compares my projections for this week's report with the change in inventories for the same period last year. As you can see from the table last year's inventories are not in directional sync with the projections. Thus, if the actual data is in line with the projections there will only be modest changes in the year over year inventory comparisons for everything in the complex.

I am adjusting my oil view and bias to cautiously bullish as the situation in the Ukraine continues to unfold. Most of the commodities in the oil complex have breached their respective technical support levels to the upside and are moving into new, higher trading ranges.

I am maintaining my Natural Gas (NYMEX:HHK14) view and bias at neutral as the market seems to be settling into a new trading range ahead of the upcoming lower demand shoulder season. The Nat Gas spot Nymex contract remains below the technical range support level of $4.40/mmbtu and is settling into the $4.20/mmbtu to $4.40.mmbtu as the market enters into the lower demand shoulder season.

Markets are mostly higher heading into the US trading session as shown in the following table.


About the Author
Dominick A. Chirichella

Energy Market Analysis is published daily by the Energy Management Institute 1324 Lexington Avenue, # 322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.

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