More Crude, Less Gasoline and Distillates

Real-time Monetary Inflation (last 12 months): -2.9%

According to this morning's Energy Department inventory report, overall U.S. crude oil inventories were built up well above industry and Street expectations. Refined product stocks, however, declined across the board.

July WTI crude oil closed down $1.46, or 2 percent, to $68.75 on Tuesday, as doubts about global economic growth pushed traders away from risk trades and toward the U.S. dollar. A short covering rally tempered early losses.

Crude prices then rose in the overnight session following the release of an American Petroleum Institute estimate of a larger-than-expected decline in gasoline inventories. Traders saw a drawdown in motor fuel as a harbinger of rising crude oil demand.

The API estimated that crude inventories rose 616,000 barrels, compared to expectations of a 200,000- to 300,000-barrel build eyed by the Street. Last week's Energy Department data showed crude supplies increased by 200,000 barrels.

Crude has sagged under the weight of rising inventories after reaching $87.15 a barrel on May 3, the highest intraday price in more than a year.

This week's government data showed crude inventories actually increased by another 2.4 million barrels. Domestic commercial stocks now stand at 365.1 million barrels, well ahead of seasonal averages.

API data estimated crude oil inventories at the Cushing, Okla. terminus would fall by 772,000 barrels from the record 37.9-million-barrel level shown in last week's Energy Department inventory report. In fact, supplies at the WTI delivery point declined by 300,000 barrels—the first drawdown in weeks. A decline in Cushing stocks will likely be seen as a positive for the oil market, as large inventories have pressured nearby contracts relative to deferred futures.

Domestic Crude Oil Inventories Vs. 3-Month NYMEX Spreads

The nearby NYMEX contract traded as high as $70.87 in electronic trading ahead of the Wednesday opening bell and the release of the definitive weekly inventory report from the U.S. Energy Department.

Government data showed gasoline inventories decreasing by 200,000 barrels—a much less aggressive drawdown than the 3.2-million-barrel off-take estimated by the API figures. The Energy Department figures were, however, in line with analysts' expectations ranging from a decrease of 200,000 barrels to an increase of 300,000 barrels.

The API pegged distillate stocks 1.5 million barrels higher after falling by 1.0 million barrels the previous week. Analysts, meantime, expected inventory levels to remain flat or rise by 500,000 barrels. Both camps were off base as Energy Department figures showed distillate fuel inventories decreasing by 300,000 barrels.

Analysts expected refinery usage to fall 0.2 points to 87.7 percent. The Energy Department put utilization rate at 87.8 percent of operable capacity. Daily gasoline production decreased to an average of 9.0 million barrels, while distillate fuel production fell to 4.2 million barrels per day.

Average daily gasoline demand ticked up to 9.2 million barrels, 1.2 percent higher from year-ago levels. Distillate fuel consumption now averages 4.0 million barrels per day, up by 15.8 percent from the same period last year.

Trading Week

Crude oil fell a rather modest 0.9 percent this week, compared to the 5.8 percent tumble taken by gasoline and a 3.9 percent dip in heating oil. The steep declines in product prices cut into refining margins. Gross profits for gasoline-rich refinery runs were trimmed to 16.8 percent, while operations producing more middle distillates had their margins shaved to 16.6 percent.

NYMEX crude oil volume averaged 805,879 contracts per day; week-over-week for the five trading days ending Tuesday, volume was down by 425,412 contracts, or 47.2 percent. Open interest fell by 129,693 contracts, or 8.8 percent.

NYMEX Front-Month Crude Oil

Technical indicators point to the crude market's oversold condition but lower prices are still possible in the near term.

If WTI spot continues its decline, last July's low of $58.25 could well be in bears' sights as the next downside target. A close above the 10-day moving average at $72.34, however, would indicate that a short-term low is in. Heavier resistance ought to be expected at spot's 200-day moving average of $76.68. Near-term support rests at Tuesday's $67.15 low with secondary support at last September's reaction dip to $65.05.