The Guest Blog

Schork Oil Outlook: Still Bullish Despite Bearish Fundamentals

Yesterday the DOE reported a large 3.12 MMbbl draw in crude oilinventories, more than double the 1.50 MMbbl draw expected by analysts and a complete turnaround to the API reporting a 2.34 MMbbl build on Tuesday night.

WTI prices broke past the 99.00 level on the day, but was this due to the DOE report or Ben Bernanke? As written in today’s issue of , we believe the latter, because the DOE breakdown is rather troubling.

Consider that the draw was skewed by a huge 4.44 MMbbl drop in the Gulf of Mexico (PADD 3) whereas almost every other region reported a build. This marks the third largest draw on record for PADD 3 for this timestep, behind only last year’s 4.76 MMbbl draw and 1996’s 5.89 MMbbl draw. Yet refinery runs in the region fell 3.13% to 7.57 MMbbls/d.

It turns out the drop was not due to soaring demand, but rather a loss of supply – imports to PADD 3 fell 0.55 MMbbls to 5.27 MMbbls, 4.48% below last year and 12.55% below the 2005-09 timestep.

This scenario played out across the country as a leak at ExxonMobil’s Silvertip pipeline below the Yellowstone River caused a 24.63% drop in imports to the Rocky Mountain region (PADD 4) while the East Coast (PADD 1) and the Midwest PADD 2) reported drops of 0.12 MMbbls/d and 0.24 MMbbls/d. Imports from all three of our largest sources (Canada, Saudi Arabia and Mexico) fell with an average decline of 7.48%.

Due to these unplanned disruptions and planned decreases in pipeline shipments, we have seen Midcontinent refiners forced to use domestic sour rather than Western Canada Select. As drawn by today’s CotD, this has pushed West Texas Sour’s discount to WTI to just 85 cents, its lowest point since May 2010 and well below the mean discount of $2.36.

Of course, swapping out crude oil grades can be a costly and time consuming process, which would help explain the 0.40% drop in national refinery utilization to 88.00%. Net input of crude oil, at 15.22 MMbbls, stands 1.62% below last year and 2.08% below the 2005-09 timestep. Meanwhile crude production rose by 58 Mbbls/d to 5.58 MMbbls, 4.22% above last year and 6.26% above the 2005-09 timestep.

Finally, the pivotal Cushing, OK hub reported a 0.62 MMbbl build to bring total storage to 37.65 MMbbls, the highest level ever seen for this timestep. In turn, the inter-market WTI – Brent spread widened to -$20.65 while the front month spread was near flat at -$0.42.

Put simply, we are impressed that WTI even managed to gain 0.64% considering that we are producing more, burning less and facing a continued bottleneck at Cushing, which had previously appeared to be easing.

It seems like WTI tagged behind the dollar and the products. Speaking of which, motor gasoline inventories fell by 0.84 MMbbls, bucking analyst expectations of a 0.50 MMbbl build.

Mogas drawdowns were likely a function of lower refinery utilization as production fell by 0.63 MMbbls/d to 8.90 MMbbls/d, the lowest level seen for this timestep since 2005. At the same time, exports were strong at 2.42 MMbbls/d, the highest level ever seen for this timestep. As for domestic demand we saw a disappointing 0.29 MMbbl/d drop to 9.02 MMbbls/d, 4.46% below the seasonal average as retail gasoline prices rose during the reference week for the first time since May.

All told we believe yesterday’s report was certainly not bullish for crude oil, and barely bullish for motor gasoline. Regardless, the market managed to settle higher and inch ever closer to the 100.00 mark. Thus, analysts at are advising clients that we maintain our bullish bias on the basis of momentum and speculation despite bearish fundamentals.


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.