HardAssetsInvestor

Written by Brad Zigler  |

March 25, 2009

There’s Plenty Of Oil (For Now)

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Stocks and the petroleum complex held hands this week as both markets skipped onto higher ground. Equities have been leading the way, providing a gauge of economic confidence for oil traders. It shouldn't be surprising, then, that last night's weakness on the equity bourses put pressure on oil prices. Oil slumped throughout the night, seeing its only bullish sparks on short covering near the open of day-session trading.

Crude prices rose nearly 10% over the past week despite significant inventory building. Given the buildup in oil supplies, the price hike's gotten pundits' and traders' tongues wagging, wondering if current market fundamentals justify the rally. U.S. oil stocks are, after all, near capacity and fast approaching highs set in boom-time 1993.

This week's U.S. Federal Reserve announcement of quantitative easing fueled oil's rally further, propelling nearby NYMEX oil futures through the $50 mark.

Also driving last night's selling was the market's digestion of data from the American Petroleum Institute showing a 4.6-million-barrel crude oil build last week. Oil analysts surveyed by Platts had earlier forecast a much more modest 1.4-million-barrel add.

U.S. Oil Inventories (ex-SPR)

Crude oil inventories, according to this morning's report from the U.S. Energy Information Administration (EIA), showed a 3.3-million-barrel increase last week. Total motor gasoline inventories dipped 1.1 million barrels, slightly more than expected, while distillate fuel inventories fell by a whopping 1.6 million barrels, more than seven times the anticipated drawdown.

Refineries operated at 82% of capacity, just slightly below expectations, cranking out less gasoline and distillate fuels than the previous week.

NYMEX traders telegraphed their apprehensions about production, moving heating oil prices higher and buoying margins yesterday. Refining mixes appeared to tip into a spring pattern when heating oil cracks surpassed parity with unleaded gasoline on Tuesday's three-penny jump in oil prices.

NYMEX Product Cracks

Crude oil stocks at the NYMEX delivery point at Cushing, Okla., fell 2.2 million barrels, or 6.4%, last week. The nearby quarterly NYMEX carry improved by 48 cents a barrel Tuesday. Over the past trading week, carry averaged $1.96 a barrel, five cents better than the previous week.

By the numbers, oil's demand picture hasn't brightened much yet. Currently, gasoline demand is running 0.7% higher than year-ago levels, but the country's thirst for distillate fuels – including heating oil and bellwether diesel – has slackened 9% according to the latest EIA figures.

OPEC production cutbacks alone may not be enough to bolster oil's price, especially if cartel members are tempted to claw back lost revenue by cheating on their quotas. 

Since last week's volume spike, trading activity in the nearby May NYMEX crude contract has slowed, perhaps signaling new buyers' shyness about current prices. Momentum, though, remains technically strong. There's resistance at $56.17 and support at the $50.60 level for May futures.

Out-of-the-money call spreads on March 2010 crude suggested by Stephen Schork's recent interview (see "Oil Spreaders Heed Schork's Call") have gained 93% over the past three weeks:

Futures:                   $53.15           $63.69