HardAssetsInvestor

Written by Brad Zigler  |

August 11, 2010

Product Demand Slackens With Inventory Builds

Details

Oil industry and Street forecasts for a decline in the nation's crude oil stockpile were outdone this morning when the U.S. Energy Department announced a 3.0-million-barrel decrease in overall supplies. The off-take reduces the domestic commercial stash of crude now to 355 million barrels.

U.S. Crude Oil Inventories And WTI Contango

Ahead of today's definitive oil inventory report, the American Petroleum Institute estimated that crude oil stocks declined by 2.2 million barrels. Sell-side analysts had forecast a drawdown between 1.9 million and 2.4 million barrels.

The government's report also pegged gasoline inventories 400,000 barrels higher. Analysts' predictions were split, ranging from a decline of 1.5 million barrels to an increase of 250,000 barrels. The API said gasoline supplies most likely declined by 1.5 million barrels.

Calls for an increase in distillate fuel inventories fell short of the Energy Department's figures, which showed a 3.5 million increase. The API looked for a 2.3-million-barrel build while Street talk among analysts put the build between 1.1 million and 1.8 million barrels.

Refineries operated at 88.1 percent of capacity last week, a steep drop from the 91.2 percent utilization rate reported for the previous week. Both gasoline and distillate fuel production declined. The average daily output of gasoline was 9.3 million barrels last week, while distillate fuels were cranked out at a 4.3-million-barrel rate.

Gasoline demand averaged 9.4 million barrels per day, up 3.3 percent from this time last year. The average daily consumption of distillate fuels was 3.5 million barrels, 3.6 percent higher than year-ago levels.

Trading Week

For the week ending Tuesday, WTI crude prices slumped 2.8 percent to finish at $80.25. Product prices were beaten down more as the 3.6 percent tumble in unleaded gasoline blendstock was accompanied by a 3.2 percent drop in heating oil.

Narrowing crack spreads cut deeply into refining margins this week. Gasoline-heavy operations produced an 8.3 percent gross while distillate-rich runs brought in 9.5 percent.

Average daily volume in NYMEX WTI futures rose 4.9 percent to 566,954 contracts. Open interest climbed 34,087 contracts to 1.268 million.

Contango widened this week as the cost of a three-month roll increased from $1.55 to $1.62 a barrel despite a 100,000-barrel drawdown in Cushing, Okla. WTI inventories.

WTI's premium to Brent crude shrank from 67 cents to 51 cents a barrel.

Technical Picture

This week's downward trajectory in crude oil prices followed bearish turns in the RSI and stochastics indicators. MACD is also threatening to turn negative.

A close below $80.21 in the front-month contract would put a notch on the bears' gun barrels. Support should be expected below $79.50, a key retracement level from crude's May decline. Deeper down is the 200-day moving average at the $78 level.

Bulls are striving to break resistance at the $82.87 level to reestablish upward momentum.

Near-Month NYMEX Crude Oil