HardAssetsInvestor

Written by Sumit Roy  |

August 03, 2011

Crude Oil Report: Brent Breaks Range Bottom But Losses May Be Limited

Details

Macro worries take their toll on oil, while inventories rise thanks to more SPR crude sales.

The Department of Energy reported this morning that in the week ending July 29, 2011, U.S. crude oil inventories increased by 1 million barrels, gasoline inventories increased by 1.7 million barrels, distillate inventories increased by 0.4 million barrels and total petroleum inventories increased by 2.6 million barrels.

The latest EIA report didn’t have much impact on crude oil. Prices were already lower on the back of worries related to the economies of Europe and the United States. Brent broke through the bottom end of its one-month $115 to $120 range, while WTI fell below $92.

Focus has shifted from oil-specific fundamentals to macroeconomic worries. In recent weeks, crude had been able to shrug off much of this bad news, but the data has deteriorated to the point where many are now seeing a distinct possibility of a recession in the United States.

On the heels of extremely weak data on manufacturing and consumer spending, all eyes will be on Friday’s nonfarm payrolls report to gauge the state of the U.S. labor market. Expectations are low, with estimates calling for employers to only have added 85K jobs in July.

Yet, while crude prices have declined in recent sessions, they have held up considerably better than stocks. Consider the benchmark S&P 500 index. It is now at the lowest level of the year after having fallen seven straight sessions — the longest losing streak since 2008. The index has so far managed to hold above the key 1250 support level on the closing basis, though it did breach it intraday. Meanwhile, crude prices are still notably above their lows for the year near $95 and $85 for Brent and WTI, respectively.

The divergence stems from the fact that U.S. stocks are primarily keying off U.S. economic data, while oil has the benefit of supply disruptions in Libya and still-strong emerging markets growth.   

Going forward, crude oil should continue to react mutedly to U.S. and European economic developments, with prices holding up relatively well barring a deep recession, which is unlikely.

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. increased by 2.6 mmbbl, above the 0.7 mmbbl 5-year average. In turn, the surplus over the 5-year average increased to 23 mmbbl, or 2.2 percent.

As we explain below, excluding the release of crude from the SPR, inventories would have declined.