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Schork Oil Outlook: Another Crude Supply Surge?

Wednesday, 1 Sep 2010 | 12:31 PM ET

According to the latest monthly update from the DOE, the build in commercial crude oil stocks in the U.S. was much stronger than we expected.

The numbers for June show inventories of crude oil at the highest level in over a generation. According to the preliminary weekly numbers we had expected supplies to top out over 355 MMbbls. Instead, supplies actually finished the month over 360 MMbbls, the first such occurrence since 1990. In fact, June’s figure of 362.7 MMbbls rank it the 04th highest June since 1980 and the 13th highest June since the government started tracking supply in 1920!

Meanwhile, this weekend’s Labor Day holiday in Canada and the U.S. marks the end of the holiday driving season. Stocks of gasoline in the U.S. finished June (and thus entered the peak driving season in July and August) at the highest level, 214.8 MMbbls, since 2005 and the 21st highest level since the time series began in 1945.

Finally, supplies of distillate fuels fell by 2.9% compared with June 2009, the month still finished at the 8th highest June, 157.9 MMbbls, since 1945. Furthermore, according to the preliminary weekly data, stocks ended July near 170 MMbbls and were estimated at over 178 Mbbls as of August 20th. As such, odds are short distillate supplies came out of the summer at the highest level since 1981.

In regard to crude oil stocks, analysts at The Schork Reportare looking ahead to the end of the third quarter and indicate that a template is currently being drawn that sets the table for another surge in stocks. Over the last four Nymex sessions the contango between the spot contract for October delivery and the November contract has surged by 88%, from $0.86 a barrel to $1.62.

Should this spread remain above $1 over the next couple of weeks we can expect a flood of barrels into the NYMEX hub in Cushing, OK to capture the yield.

Either that or we will see a fire sale of barrels on the spot market. As of last week’s report stocks in Cushing, 36.3 MMbbls, were in the 96th percentile. In other words, the inn is almost full as it currently stands.

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

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