HardAssetsInvestor

Written by Brad Zigler  |

August 04, 2010

Oil Supplies Drawn Down More Than Expectations

Details

This week, oil analysts believed U.S. crude oil inventories would fall as the result of slipping imports and Tropical Storm Bonnie-induced production interruptions. Most, however, didn't foresee stockpiles being drawn down as much as the government reported this morning.

The U.S. Energy Department's weekly stocks report put the draw in domestic supplies at 2.8 million barrels vs. the Street consensus of a 1.4-million- to 1.7-million-barrel decline.

The industry-supported American Petroleum Institute estimated that crude oil inventories would decline by only 776,000 barrels.

Gasoline inventories, according to the government, increased by 700,000 barrels, roughly in line with analysts' forecasts of a 400,000- to 800,000-barrel build. The API was eyeing a 2.3-million-barrel surge in supplies.

The Energy Department also reported a 2.2-million-barrel jump in distillate fuel stocks, a more aggressive build than the 1.1-million-barrel build foreseen by the API and the 700,000-barrel-increase predicted by analysts.

Refinery usage, expected to decline to 89.9 percent from the previous week's utilization of 90.6 percent, actually rose to 91.2 percent. Gasoline production eased to an average of 9.4 million barrels per da, while the average daily output of distillate fuels increased slightly to 4.4 million barrels.

Energy Department figures show gasoline demand, at a daily average of 9.4 million barrels, is up 2.3 percent from year-ago levels. Distillate fuel demand has averaged 3.5 million barrels per day, 2.7 percent higher than last year at this time.

Trading Week

Crude oil's 6.5 percent gain for the week ending Tuesday was trumped by a 6.7 percent rise in gasoline prices. Heating oil, however, was the petroleum complex price leader, with an 8.3 percent jump. Crack spreads widened across the board, but refiners running wintertime mixes were better off. Gross refining margins for gasoline-heavy runs ended the week at 9.0 percent; distillate-rich operations earned 10.1 percent.

Since last Tuesday, the average daily volume in NYMEX WTI crude oil rose 15.7 percent to 540,683 contracts, while open interest climbed 4,645 contracts to 1.235 million.

Reflecting a build of 600,000 barrels at the Cushing, Okla. delivery terminus, NYMEX contango widened this week. A three-month roll, which cost $1.38 per barrel last week, is now $1.55.

WTI's premium to North Sea Brent shrank this week from an average $1.26 per barrel to 67 cents. Yesterday, Brent traded at a 21-cent premium to WTI as a result of cutbacks in the export feed into the Brent crude stream.

Technical Picture

Oil traded on either side of unchanged in the overnight market Tuesday, but bids climbed as the time for the inventory report's release neared. Crude's prospects have brightened this week as stochastics, together with the RSI and MACD indicators, have all turned bullish.

The March-April highs at the $82.80 level are the September contract's next upside targets. Support rests at $79.50, the 62 percent retracement of May's decline.

NYMEX Nearby Crude Oil