Global demand concerns = Bullish indicators = Distressed traders
Yesterday (Wednesday), the markets returned to turmoil with the Dow Jones index dropping by more than 500 points, effectively wiping out Tuesdays gains to leave us below the 11K barrier for the second time this week.
Despite a stronger dollar and weak equities, front month WTI jumped 4.53%, the highest daily gain since May 9th and, with a settle of 82.89, a definitive settle above the 80.00 barrier.
A large factor in the gains was likely the DOE inventory report, which showed a 5.23 MMbbl drop in inventories, 74.87% above the 2.99 MMbbl draw seen last year and a stark contrast to the 1.35 MMbbl build expected by analysts. In fact, this draw does not even account for the release of 2.49 MMbbls from the SPR, which resulted in a total draw of 7.72 MMbbls.
The breakdown was similarly encouraging, with a 1.37 MMbbl draw from the Cushing, Okla. hub bringing inventories to their lowest point since the week ending November 26th, 2010. The draw is especially encouraging relative to seasonal norms: since the first week of April, stocks at Cushing have fallen 17.41% in 2011, in 2009 they rose 8.01% and in 2010 they rose 21.41% over the same timestep.
Further south, the Gulf of Mexico region (PADD 3) reported a 3.28 MMbbl draw (blowing away last year’s 0.63 MMbbl build) as refinery utilization in the region jumped from 88.5% to 90.1%.
Yet as PADD 3 recovered, the Midwest (PADD 2) saw a drop in refinery utilization from 96.9% to 93.9%, as Valero’s 200 Mbbl/d Memphis, TN refinery saw its main production units shut down after a fire on August 05th and BP’s 420 Mbbl/d Whiting, IN refinery saw its smaller crude unit shut for unplanned maintenance on July 31st and has yet to resume standard operation.
As written in today’s issue of , the overall picture remains bullish: crude runs in PADD 3 have jumped from a 4.71% YoY deficit in the prior report to just a 0.01% deficit, whereas PADD 2’s surplus has eased from the prior report’s 3.46% but remains firm at 1.61%. On a national level, total crude runs stand at 15.62 MMbbls/d and have seen the YoY surplus increase from 0.55% in the prior report to 3.70% as of this week.
As for the distillates, the largest draws came from PADD 2 and PADD 3 as industrial demand remains firm. In contrast, it seems PADD 1 refinery activity was focused on the distillates as saw inventories rise by 1.14 MMbbls and diesel saw a 0.85 MMbbl build in the region.
Given a 52 Mbbl/d drop in distillate demand, and seasonal demand patterns, analysts at are advising clients to look for gains in the RBOB crack to outpace the heating oil crack.
Bottom line: excepting distillate builds in PADD 1, yesterday’s report was almost unanimously bullish…
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.