Refined products driving the price of crude?
Today’s inventory report showed a build in crude oil stocks to the tune of nearly 5 million barrels over last week’s data. The expectation was for just over 3 million barrels. This would appear to be bearish on its face value. So, why is the market trading at higher price than it was prior to the data? Granted, we did sell off to nearly 48 dollars in a knee jerk reaction but have rallied back to 49.50 an hour after the release.
One reason can be found in the bigger than expected draw in the distillate products (click here for the inventory report highlights). Demand appears to be significantly higher for the refined products than directly for crude oil. Lower prices at the pump and for the utile distillate products (diesel, heating oil, etc.) are driving the demand portion of the supply/demand curve. With end users and resellers lining up to purchase at these prices we are seeing a buyers’ market in the refined products really start to build the base here and even potentially start to drive the price higher.
We are seeing more and more consumer side buyers come into the hedging market as they attempt to lock in these prices for their fuel needs going forward. The crack spread, 1 part ULSD and 2 parts RBOB vs. 3 parts crude, continues to show strength lending credence to the idea that the demand for hedging and end user products will lead the way should we see higher pricing. In fact, the spread between refined products and crude is matching its levels for early 2014.
This could be a transitory development as more and more entities complete their hedging. The ‘floor’ could conceivably fall out again if the buyers either from a practical user defined role or hedging role were to dry up. However, it would be hard to see demand taper precipitously with the pricing being so attractive particularly if the U.S. economic data remains strong (take a look at the crude/crack spread chart below).