Wednesday, March 26. 2008
Crude Oil Inventories
This week's inventory data marked a subtle shift. Crude oil inventories had been expected to rise but remained basically flat with last week's data. As my chart at the end of today's post shows, inventories are about average for this time of year.
The big porblem remains gasoline where inventories are not only above average but also above the 5-year high for this time of year. Gasoline inventoeis were expected to fall this week but they actually fell even more than widely predicted. This is bullish for gasoline.
One of the most obvious victims of the high gasoline inventories has been the refiners. Sky-high gasoline inventories put downward pressure on gasoline prices relative to crude and that hits the refiners. This is unusual because typically the period between late January and May is bullish for the refiners with crack spreads--a measure of refiners' profit margins--tending to rise during the run-up to summer driving season.
This week's gasoline numbers ameliorate the situation slightly; however, it's important to note that we are early in this trend and gasoline inventories (as pictured below) remain bloated by historical norms.
A few additional points are worth noting in my view. One is that refiners are scaling back on the utilization of their refineries because crack spreads are so poor. Refinery utilization came in at just 82.2 percent in this report. With utilization this low, refiners may yet bring gasoline inventories back under control over the next few months.
In addition, gasoline demand is only off 0.3 percent compared to the same 4-week period one year ago. That's not much considering how high gas prices are and how weak the US economy looks. Meanwhile jet fueld demand is up 1.6 percent year over year -- also impressive given the typical assumed effect of a weak economy on travel demand.
Finally, imports dropped 570,000 barrels per day over the same period one year ago. This could be a sign of discipline on the production front from OPEC countries. It's mainly conjecture on my part but OPEC countries can see the US market is well-supplied with oil and gasoline -- they may be concerned a weakening economy would eventually send crude prices lower. Therefore, they're seeking to keep supplies balanced.
Bottom line: today's report was bullish and there are some positive trends developing. However, the broader picture is marginally bearish for crude oil; oil continues to be driven more by currency fluctuations than fundamentals. Natural gas remains my favoured market and I'll be back tomorrow morning with a detailed rundown and take on the gas inventory figures.
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