Yesterday (Wednesday), the DOE reported a 4.84 MMbbl build in crude oil inventories, blowing away analyst expectations of a 1.2 MMbbl build. The API had reported a (comparatively better) 2.12 MMbbl build on Tuesday night, and last year saw a 3.89 MMbbl draw for the same timestep, so surely the DOE’s number incited a sell-off, right?
Not really… prices were down to 86.20 before the report was released, but settled the day a few hours later at 87.33. If the bulls can rally off this report, their conviction is outstanding, because this was not a bullish report for WTI on the breakdown either.
Stocks at the Cushing, Okla. hub rose by 0.86 MMbbls, the largest build ever recorded for this timestep and well outside the 0.69 MMbbl draw reported for the same week last year.
As we have mentioned ad infinitum, stocks at Cushing are a function of crude oil demand, and builds here imply weakness in the front month spread, which fell to -$1.97 yesterday, its lowest point since September 2010.
As shown in today’s Chart of the Day, this is a stark contrast to the Brent contract, whose front month is trading at a tiny -$0.05 discount to the second month (the first point is the spot contract, which has spiked higher due to Hetco and other physical supply concerns). For the March contract, Brent is trading at a $9.06 premium to WTI as of writing; for the April, a $7.41 premium; and so on for a median premium of $2.66 over the next 30 contracts.
It is not too surprising - gasoline inventories at the Amsterdam, Rotterdam, Antwerp (ARA) hub stand 24.50% below last year while jet fuel inventories stand 29.27% below last year. In contrast, domestic motor gasoline inventories (which we will discuss in greater detail below) stand 0.28% above last year while jet fuel inventories stand just 2.16% lower YoY. Considering that refineries are the only end users (and ultimate purchasers of) crude oil, which market is more likely to see strong refinery demand?
The DOE answers that question for us: domestic refinery capacity utilization fell 1.20% to 81.80%, the third lowest level for this timestep in the past 20 years. In fairness part of the drop is seasonal as refineries enter maintenance season and switch from winter fuels to gasoline, a process which takes place later in Europe. Yet we remain concerned about the low absolute percentage.
Moving on, the majority of yesterday’s build came from the Gulf of Mexico (PADD 3). This should come as no surprise after the migration from PADD 3 in December due to tax concerns, but the rate at which stocks are returning is troubling. Yesterday’s 5.90 MMbbl build was the week’s largest on record and the cumulative injection over the past two reports comes to 12.77 MMbbls, the highest value on record (as shown below) and almost double the 6.22 MMbbls seen last year.
On the products side, motor gasoline inventories rose by a seasonal 2.40 MMbbls, in line with the 2.30 MMbbl build expected by analysts. Traders were likely more focused on a large 1.36 MMbbl draw in PADD 3, as RBOB prices rallied yesterday to near $2.44 levels.
In fact, the build may have been much smaller if not for a 2.10 MMbbl build on the East Coast (PADD 1). We are not too concerned with PADD 1 as a fundamental demand indicator because heavy disruption took place due to winter weather.
In turn, heating oil inventories fell 1.65 MMbbls in PADD 1 while small builds in the Midwest (PADD 2) and PADD 3 led to a national heating oil draw of 1.56 MMbbls. Diesel stocks rose by a seasonal 1.42 MMbbls while total distillate stocks fell by 0.14 MMbbls, less than the 0.50 MMbbl drop expected by analysts.
Yet NYMEX heating oil prices rallied close to 3.00% yesterday – what gives?
Traders may be focusing on a 1.24 MMbbl draw in PADD 1 and ‘writing off’ a 1.10 MMbbl build in PADD 2. We are hearing reports that pipelines from Canada are congested and over-subscribed, with Enbridge (whose Lakehead system connects Illinois to Canada) stating that several of its lines were oversubscribed by 7% to 23%. Thus the build in PADD 2 may be a function of logistics, not weak demand.
All told the report was bearish for the NYMEX WTI to ICE Brent spread but bullish for the products, and the 321 crack rallied to a high of $18.658 yesterday, its highest point since February 2009. Here at The Schork Report, we maintain our bullish daily bias for WTI; it seems the bulls are more than happy to carry WTI on the back of the products and the Dow Jones breaking the 12,000 mark.
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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.