ENERGY PRICES WERE WEAK ON TUESDAY… the bottom fell out from underneath the entire complex, again. As such, the bulls are running out of time… hoping, praying, pleading today’s DOE report will give them salvation. Speaking of which, the crowd is expecting a net build of 2.75 MMbbls in the major products and a 3.0 MMbbl draw in crude oil.
Crude oil supplies in the U.S. have dropped in six out of the last seven reports by a total of 25.1 MMbbls or 6.7%. While that is indeed large, there is no reason to think this purge will not continue, slack capacity utilization rates notwithstanding.
Despite this purge, the year-on-year surplus actually increased by 156 bps to 16.8% and crude oil supplies headed into the 04th of July holiday (the start of the peak driving season) with 350.2 MMbbls in tank, i.e. 4.5 MMbbls above the third quartile (1983 to 2008). At the same time the gasoline market entered the peak season with supplies right around the median of the previous ten seasons. Thus, given extant demand destruction, it is reasonable to assume supplies are sufficient.
In the vein, the ratio of supplies of crude oil to gasoline is 1.66. The normal relationship is closer to 1.5 at this point in the season. In other words, crude oil, relative to ample seasonal supplies of gasoline is still sky high. Therefore, the industry will still take measures (limit imports, reduce throughput… etc) to lower supplies. Be that as it may, the futures market is showing little regard for this probable event. The significant flattening since the first quarter in the London and New York forward curves has faded (see chart in today’s issue of ). Thus, the contango or the premium afforded the deferred contracts still exists. Bottom line, supplies will continue to fall, but traders are still discounting nearby crude oil. In other words, the market is not concerned with the availability of nearby supply, the extant purge notwithstanding.
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Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.