In last Wednesday’s edition of The Schork Report, we expressed our disagreement with the 2.00 MMbbl draw in crude inventories expected by analysts from the DOE report.
We stated that “we are skeptical that they will see it. Instead, we are looking for a number closer to the survey’s 1.50 MMbbl maximum build… …we may see some odd draws in the Gulf of Mexico due to end of year tax reporting, but we maintain our daily bearish bias in advance of the DOE reporting what could be a big total build.”
On cue, the DOE reported a 1.03 MMbbl build in crude stocks, with the only draw being seen in the GoM. Before we could pat ourselves on the back, however, we saw a large gain in crude oil prices for the day, despite a higher dollar and mixed macro-economic data.
The report seems bearish even on the breakdown — stocks at the Cushing, OK hub rose by 0.56 MMbbls and imports surged by 14.75% or 1.16 MMbbls/d.
"Instead, it seems the rally was more a function of technical trading."
The products saw more of the same with a 1.91 MMbbl build in mogas stocks blowing away analyst expectations of a 1.25 MMbbl draw and a 0.54 MMbbl draw in distillates almost a third of the size expected by analysts. Furthermore, a drop in mogas demand was met by an increase in production, while distillate demand growth of 24 Mbbls/d was overshadowed by a 63 Mbbl/d increase in production.
Heating oil stocks rose by 0.50 MMbbls despite colder weather across the country, while diesel stocks fell by 1.04 MMbbls but, at 105.97 MMbbls, remain 39.22% above the 2004-08 average.
Instead, it seems the rally was more a function of technical trading (the bears had tested but failed to hold prices below the 50 day MA of 81.83 for the previous five sessions leading to Wednesday) and a drop in initial jobless claims to their lowest point since the week of July 18th, 2008.
As stated in last week’s Trading the Technicals section of The Schork Report, volatility has a tendency to spike during Thanksgiving week, and we may have seen the bears closing out their short positions ahead of the holiday i.e. a possible short covering rally. Keep in mind that prices had fallen some 8.33% since November 10th and further weakness may have been stymied regardless of the bearish fundamental picture. We also saw very little action on the WTI front month spread, which settled Wednesday exactly where it opened, at a 57 cent discount. This suggests that there was little in the DOE report which suggested supply concerns relative to demand.
The bottom line is that we believe the DOE data looks bearish, but we question whether speculators even bothered looking at it. Fortunately, it seems the natural gas markets are more attuned to the underlying fundamentals.
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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.