Weekly Oil Roundup: A Middling Crude Build

U.S. crude prices fell sharply on Tuesday, but ratcheted upward overnight ahead of the week's U.S. Energy Department inventory report release.

October WTI crude fell $2.78, or 3.7 percent, to settle at $71.92 a barrel in Tuesday's NYMEX floor session.

Judging from the muted reaction in post-settlement trading, a large crude oil build was apparently baked into prices. The release of the American Petroleum Institute's estimate of a 4.8- million-barrel increase prompted no further selling in the overnight market. Prices, in fact, climbed steadily in anticipation of this morning's definitive government inventory figures.

Analysts expected a 1.1-million- to 1.3-million-barrel gain in crude stocks. Everybody had an opportunity to be disappointed when the Energy Department data split the difference to show commercial crude oil inventories had built up by 3.4 million barrels to 361.7 million.

The API said gasoline supplies slipped by 589,000 barrels, while Street calls were mixed, ranging from a drawdown as deep as 250,000 barrels to a build of 200,000. Government figures vindicated the bulls to show inventories falling by 200,000 barrels.

The API's estimate of a 1.9-million-barrel decline in distillate stocks contrasted with analysts' forecasts of a 1.0-million- to 1.2-million-barrel increase. The Energy Department report sided, albeit mildly, with the API, to show a drawdown of 700,000 barrels.

Refinery usage, seen unchanged at 87.7 percent of capacity, actually fell to 87.0 percent. Gasoline production decreased to a daily average of 9.3 million barrels, while distillate output inched lower to 4.3 million barrels per day.

Gasoline demand averaged 9.4 million barrels per day, up 1.9 percent from year-ago levels. Daily distillate fuel consumption averaged 3.7 million barrels, up 7.8 percent from the same period last year.

Trading Week

Even with Tuesday's sell-off, nearby WTI crude oil managed to eke out a 0.4 percent gain for the week. For the year, the U.S. benchmark is down 9.4 percent. Product prices are more buoyant. For the week ending Tuesday, unleaded gasoline rose 2.8 percent and heating oil climbed 3.2 percent.

This week's pricing had a salutary effect on crack spreads. Gasoline-heavy refining runs grossed 11.7 percent, while distillate-rich operations earned 13.2 percent. Despite this, the second-month heating oil/gasoline spread lost 4 cents a gallon since October crude became the lead month.

Average daily volume for WTI futures on NYMEX climbed 10.9 percent to 703,987 contracts. Open interest inched up 2,333 contracts to 1.264 million.

Contango widened this week. The average three-month roll cost $3.14 per barrel compared with last week's mean of $2.01. A carry market has developed in the near months; at the close Tuesday, the week's average annualized net return for a three-month cash-and-carry was 5.2 percent.

Coupled with the WTI contango was a widening in the premium commanded by Brent crude. This week, the North Sea benchmark sold, on average, for $1.29 more than WTI. Last week, the U.S. benchmark sold at a 3 cent premium.

Ethanol prices averaged 4 cents a gallon more this week, which, combined with a 4-cent-a-bushel uptick in corn prices and stable dry grains, pushed the per-bushel crush margin 8 cents higher. The correlation of ethanol prices to corn hovers at 84.3 percent.

Technical Picture

Crude oil's technical picture remains clouded. MACD is still in bearish territory, while the RSI indicator has crossed to the downside, a move confirmed by stochastics.

Spot crude is struggling to remain above the Aug. 25 low of $70.76. Bulls are aiming for a close above Friday's $75.59 high, but first have to punch through resistance near $75.42.

More immediate is the barrier represented by crude's 10-day moving average at $73.60.

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