Brent/WTI spread narrows

Energy Report

Global equities were mostly lower over the last twenty four hours with the EMI Global Equity Index declining by 0.43 percent. The Index has moved back into a negative position for the year with Japan still the worst performer in the Index as the Bank of Japan minutes (released overnight) showed an ongoing commitment to quantitative easing policy in the wake of the consumption tax increase (no surprise) without giving hints as to when any escalation of the policy might be expected. The Japanese Nikkei declined by almost 3 percent today. Global equities have switched to being a slightly negative price directional driver for the oil complex over the last twenty four hours.

Wednesday's API report was biased to the bearish side even with a surprise decline in total crude oil stocks as gasoline and distillate fuel inventories both built. Crude oil imports into the US decreased by 170,000 barrels per day with refined product exports from the US likely increasing from the Gulf region. Total inventories of crude oil and refined products combined were higher on the week.

The oil complex is mixed 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 stocks decreased by 1.8 million barrels. On the week gasoline stocks increased by 2.4 million barrels while distillate fuel stocks increased by 0.8 million barrels. Refinery utilization rates increased by 0.8 percent.

The API reported Cushing crude oil stocks decreased by 1.5 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 build 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 even as the spring refinery maintenance season starts to wind down. I am also expecting a modest build in gasoline inventories and in distillate fuel stocks last week with refinery run rates increasing slightly last week.

I am expecting crude oil stocks to increase by about 1.5 million barrels hitting another new all-time record high. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 5.4 million barrels while the overhang versus the five year average for the same week will come in around 24.3 million barrels.

I am expecting crude oil inventories in Cushing, Ok to decrease strongly as outflow from the region increased strongly last week. In addition an increase in refinery utilization rates in the PADD 2 region is likely to result in an increase in crude oil demand and thus supportive of the destocking of crude oil inventories in both PADD 2 and Cushing which is bearish for the Brent/WTI spread.

The Keystone Gulf Coast line increased its pumping rate strongly last week. The line is above the 400,000 bpd level for the week ending May 2nd based. Genscape is reporting a flow of 487,061 bpd or an increase of 279,603 bpd compared to the previous week. Last week the Keystone line moved about 3.4 million barrels of crude oil out of Cushing or about 1.3 million barrels more than the previous week suggesting that there is likely to be a modest decline in Cushing stocks based solely on the current pipeline data.

According to the latest data from Genscape (for more information on Genscape data products visit their website) the pipeline outflow from Cushing increased strongly as the Keystone Gulf Coast line surged higher last week. For the week ending May 2nd total net outflow from Cushing increased by an average of just 231,332 bpd (mostly due to an increase on Keystone). Seaway pipeline averaged 294,340 bpd for the week ending May 2nd and is once again below the 300,000 bpd level. The inflow into Cushing increased strongly by 107,636 bpd with the largest increase on the Keystone – Steele City line into Cushing. The Hawthorn pipeline was active last week as rail movements into this area were flowing once again.

I am expecting a modest build of crude oil stocks in PADD 3 (Gulf) of over 1.5 million barrels which will set another new record high inventory level. Following is the status of PADD 3 crude oil stocks compared to working storage capacity in the region. As shown in the chart not only are PADD 3 stocks at record high levels (and still growing) they are already at 78.8 percent of storage capacity heading into this week’s number. With crude oil demand in the region starting to pick up we may be starting to approach a peak in inventories in the PADD 3 area over the next month or so.

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