HardAssetsInvestor

Written by Brad Zigler  |

December 08, 2010

A Refiner’s Dream: More Oil, Less Gasoline

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Real-time Monetary Inflation (last 12 months): -2.2%

Crude oil's rally reversed yesterday despite an industry report forecasting a deeper-than-expected decline in U.S. oil inventories.

The American Petroleum Institute estimated that U.S. crude inventories fell by 7.3 million barrels last week, but definitive numbers released by the Energy Department this morning showed the drawdown was actually 3.8 million barrels. Analysts had expected a 1.3-million- to 1.4-million-barrel decline.

The API was closer to the mark with its gasoline estimate. The industry group saw motor fuel stocks rising by 4.8 million barrels, a more aggressive build than the 300,000- to 500,000-barrel increase expected by the Street. Inventories actually rose by 3.8 million barrels, according to the government.

Closer still was the API's reckoning of distillate fuels. Government data shows inventories were built up by 2.2 million barrels last week. The API had eyed a 1.7-million-barrel increase, in stark contrast to brokers' average forecast of a 500,000- to 900,000-barrel decline.

Refinery usage, which was expected to rise by 0.9 percentage points to 83.5 percent, instead rose to 87.5 percent. Gasoline production increased to a daily average of 9.4 million barrels, while distillate fuel output—including diesel and heating oil—increased to 4.5 million barrels.

Gasoline demand now averages 9.0 million barrels per day, down 0.7 percent from this time last year. Mean distillate fuel consumption is 3.7 million barrels daily, a 5.3 percent increase from year-ago levels.

Trading Week

Refining margins were lifted this week as product price increases outpaced crude's upward trend. For the week ending Tuesday, nearby West Texas Intermediate crude gained 5.5 percent, while gasoline ran up 6.4 percent and heating oil was boosted 6.6 percent. Gasoline-rich refining runs earned a 12.6 percent margin, a 1 percentage point gain over last week. Distillate-heavy operations grossed 13.9 percent for a 1.1 percentage point increase.

Crude oil volatility, measured by the CBOE Oil Volatility Index (CBOE: OVX), ticked up 0.3 points to 32.2 percent as the cost of protective puts rose 45.7 percent.

Average daily volume for NYMEX WTI shot up 49.7 percent to 697,121 contracts. Open interest jumped by 31,734 contracts to 1.37 million.

Alongside a dramatic squeeze in WTI's contango, the U.S. benchmark's discount to Brent crude ballooned to $1.81 from last week's $1.22. A three-month roll in NYMEX WTI, which cost $1.40 a barrel last week, now runs 99 cents.

The heating oil/gasoline spread widened by 1.06 cents a gallon this week. Over the same period, the corn/ethanol crush lost 16.7 cents a bushel, the result of a 15.75 cent spike in corn prices. Ethanol's 21-day correlation to corn prices has now tightened to 95.3 percent. Gasoline's premium over ethanol shrank a bit to 25.9 cents a gallon for January delivery.

Technical Picture

Yesterday's spike, if sustained, would have marked a 50 percent retracement of crude's 2008 decline. With the reversal, nearby support will likely be found for the January contract at the area of the Nov. 30 high—$85.90—which also corresponds to the delivery's 10-day moving average.

Two areas of intermediate support—at $87.57 and at $86.44—could be waylay stations.

On the upside, the $90.54 level remains a hurdle for closing prices, while interim resistance at $90.29 ought to be anticipated.

Nearby NYMEX WTI Crude Oil