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Schork Oil Outlook: Heating Oil Inventories - The Real Story

Yesterday (Wednesday), Uncle Sam reported its fourth consecutive +2MMbbl build in crude oil stocks, with a seasonal 3.0 MMbbl increase bringing total inventories to 337.53 MMbbls.

Unlike the previous report’s build, which came almost exclusively from the Gulf Coast (PADD III), this week saw PADD III’s 2.17 MMbbl build matched by a 2.16 MMbbl build on the West Coast (PADD V), while the East Coast and other districts saw <1MMbbl draws.

All told, crude oil inventories are now 10% above the 2004-08 timestep and the deficit to 2009 has narrowed from 5.5% two weeks ago to 3.9% as of February 19th.

Last week, we said, “If inventory levels are moving closer to 2008 levels, where does that place consumer demand [and] the economic recovery?” Analysts atThe Schork Report retain the same concern this week, despite what the bulls may be doing to WTI.

On the major products side, gasoline stocks reported a non-seasonal 0.90 MMbbl decrease, bucking analyst expectations of a 0.6 MMbbl build and the API’s 1.7 MMbbl reported build. While un-seasonal, a drop in stocks for this timestep is not unprecedented - 2009 saw a 3.3 MMbbl draw for the third week of February.

A break from snowstorms and a likely true-up to the prior week’s sharp decline led to a 6.4 percent rebound in demand to 9.06 MMbbl/d; the seasonal norm is 9.02 ±0.27 Mbbl/d. Despite the draw, total mogas inventories remain 7.3% above last year and 4.4% above the 2004-08 timestep.

Meanwhile, distillate stocks dropped by a seasonally small 0.59 MMbbls - keep in mind the historic draw for this week is 1.76 ±0.79 Mbbls, implying that yesterday’s draw cannot be explained away by a shuffle in ships or a recording error since it falls outside the standard error range. Part of the weakness was due to a rebound in imports, which grew by 13.6 per cent to 0.44 MMbbl/d, and a decrease in demand, which dropped by 3.3 per cent to 3.66 MMbbl/d. All told, total distillate stocks stand at 152.66 MMbbls, 7.8% above 2009 and a whopping 26% higher than the 2004-08 average. In fact the February average is at its highest point since 1983.

Key Takeaways:

- With last week’s large draw, we assumed heating oil stocks were acting in accord with record-breaking cold. Then we find out that heating oil stocks actually grew by 0.55 MMbbls as of last Friday. The last time we saw a build in the third week of February was 2006’s 0.45 MMbbl and the last time we saw one this big was 2000’s 1.1 MMbbls.

Are consumers simply not responding to the colder weather? Not quite, however, a recent surge in production has been able to mask strong furnace demand. PADD I (East Coast) which bore the worst storms so far this year, saw a 0.30 MMbbl gain in heating oil stocks (>5×10-4). This makes sense in light of:

- Total imports of heating oil nearly doubled, from 106 Mbbl/d the week before to 204 Mbbl/d as of last Friday.

With the Northeast getting pounded once again by Mother Nature (with more snow expected next week), it remains to be seen if stiff production and imports will be able to sate the bears (Nymex heating oil lagged severely behind the complex yesterday).

- As far as that other transportation fuel goes, ULSD supplies (<1.5×10-5) inched up 0.08% to 94.9 MMbbls and LSD (>1.5×10-5 ?2 < 5×10-4), fell by 7.4% to 15.2 MMbbls. As a result, the ULSD share of the entire U.S. diesel market increased from 85.3 to 86.2%.

- Finally, a surprising 0.90 MMbbl draw in mogas stocks caused the RBOB contract to rally (yet again) yesterday, and the contract closed 8.5% higher since the start of the month. We believe traders are bidding higher on the strength of the economy – demand purportedly surged by 0.54 MMbbls to 9.06 MMbbl/d, its largest week-on-rise since October 2003. However, we place this bump on a true-up from the previous report.

For the week ending Feb 12th, demand dropped by 0.25 MMbbls to 8.52 MMbbl/d, 4.3% below last year and 4.8% below the error range. Demand as of last week clocked in 0.6% above last year. Notes The Schork Report : the net effect means gasoline demand is well within seasonal norms, in fact the February average is 2.7% below 2009 and 2.0% below the 2004-08 average.

The market disagrees, as RBOB continues to climb, but what goes up… In the meantime, gasoline demand will likely suffer over the next week-or-so as severe winter storms are forecast to slam into the I95 corridor (Washington DC to Boston) over the next week.

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Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.