HardAssetsInvestor

Written by Brad Zigler  |

December 15, 2010

A Whopping Big Crude Oil Drawdown

Details

Real-time Monetary Inflation (last 12 months): -1.6%

Domestic crude oil inventories plummeted by a whopping 9.9 million barrels according to the latest report from the U.S. Energy Department. At 346.0 million barrels, crude stockpiles are still above average for this time of year, but the decline is the largest weekly drawdown since September 2002.

The dramatic decline in crude stocks surprised industry insiders and analysts alike. In its weekly market estimate, the American Petroleum Institute called inventories 1.4 million barrels lower, while Street forecasts pegged the decline between 2.5 million and 3.0 million barrels.

In this morning's report, the Energy Department also said gasoline inventories increased by 800,000 barrels, far less than the 2.4-million-barrel build anticipated in the API report. Brokers had been eyeing a 1.9-million- to 2.0-million-barrel add.

Government figures showed distillate fuel inventories increased 1.1 million barrels, a build that fell short of the 2.0-million-barrel step-up foreseen by the API and skunking analysts' calls for a 300,000-barrel drawdown.

Another surprise came in refinery utilization, which increased to 88.0 percent from 87.5 percent. The Street had been eyeing a decline to 86.7 percent.

Utilization favored distillate production last week as daily output increased to 4.5 million barrels. Gasoline production, meanwhile, declined to 9.3 million barrels.

Gasoline demand averaged 9.1 million barrels per day, up 0.6 percent from this time last year. Distillate fuel consumption, at 3.7 million barrels, is 3.9 percent higher than year-ago levels.

Trading Week

Refining margins were pinched for the week ending Tuesday. Crude oil prices dipped 0.5 percent, matched by a 1.0 percent decline in gasoline prices and a 0.3 percent loss in heating oil. Gasoline-heavy operations saw their gross inch down 0.4 points to 12.2 percent, while distillate-rich runs earned 13.7 percent, 0.2 points less than last week.

Expectations for crude oil volatility, measured by the CBOE Crude Oil Volatility Index (CBOE: OVX), dipped 3.2 points to 29.0 percent, while the cost of protective puts slipped 10.3 percent.

Average daily volume for NYMEX West Texas Intermediate rose 10.5 percent this week to 770,178 contracts. Open interest climbed by 14,324 contracts to 1.383 million.

The heating oil/gasoline spread favored the heavier distillate this week, improving by 1.59 cents a gallon, or 9.5 percent. The corn/ethanol crush lost 4.3 cents a bushel, as a 15-cent-a-bushel increase in input corn costs swamped a relatively modest gain in final ethanol prices. Corn's correlation to ethanol prices—now at 95 percent—increased marginally over the week. Gasoline's trading at a 13.5-cent-a-gallon premium to the alcohol fuel.

Brent crude's premium to WTI widened from $1.74 a barrel to $2.26 this week, as the U.S. benchmark's contango bounced back. A three-month roll on NYMEX, which cost 99 cents a barrel last week, is now $1.41.

Technical Picture

Crude oil continues to be a trader's market, though its underlayment is bullish following an upside crossover in the MACD indicator early this month. A bullish wedge pattern has developed in the January WTI contract's chart over the past two weeks.

Nearby NYMEX WTI Crude Oil

With the contract at $88.50 this morning, near-term resistance was poised at $89.51. On top of that is the bull's objective at $90.41, representing a 50 percent retracement of crude's 2008 decline.

Support should be expected at $87.25 and, below that, at $85.91.