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Schork Oil Outlook: Market Skies Are Grey

ENERGY PRICES WERE MIXED ON WEDNESDAY… liquids drifted lower after the DOE released what was, for all intents and purposes, a hum-drum weekly inventory report. Meantime, Henry Hub gas futures drifted higher. As far as today’s EIA report goes, the crowd is expecting a seasonally small injection in the low 50s. That makes sense.

Yesterday the U.S. government reported that net commercial crude oil stocks inched up by 0.13 MMbbls or 0.04% to 343.8 MMbbls. As a result, the surplus to a year ago and to the 2003-2007 timestep was essentially unchanged. All told, total crude oil inventories (commercial + SPR) in the U.S. as of Friday, August 21st increased by 0.01% to 1.068 billion (×109) barrels. We have to keep in mind, imports will trend lower over the next few weeks. There are only two more weekends remaining in the summer driving season. After that, refineries will then head into fall turnarounds. In other words, weak demand to boil oil is about to get even weaker.

Over the last five weeks gasoline stocks have declined by 7.3 MMbbls or 3.4%. That is 2.4 MMbbls or 124 bps below the implied seasonal time series. Thus, with only two reports in the season remaining, odds are good stocks will enter the fall turnaround season (when we will see another series of seasonal draws) above the psychologically important 200 MMbbl threshold. That’s a good thing.

Bottom line, last week’s 8.4 MMbbl draw in crude oil is still unexplained. Whereas the API reported a semi true-up Tuesday, the DOE failed to corroborate yesterday. Nevertheless, overall inventories remain well above seasonal norms as we head into a low demand period.

A resurgent crude oil market in the futures continues to provide lift for residual fuels. As of Tuesday, August 18th, open interest in the NYMEX NYH 1% swaps was 22,731 with non-commercial longs outpacing shorts by a 2-to-1 margin. Interest in the USGC 3% was 40,918 with longs over shorts by a 2.5-to-1 margin. Meantime, interest in the NYH/USGC swap was 8,614 and in the USGC cracks 15,527. The GC fuel oil crack settled last week at minus $7.26 a barrel. A year ago this crack was trading at below minus $20 a barrel (see graph in today’s issue of The Schork Report).

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.