Oil: Is the Other Shoe Dropping?

Yesterday's Desktop column ("Red Flag: Oil's Faltering") ended with a puzzle. Would today's oil inventory numbers signal an end to oil's attempt at another leg up?

In fact, January NYMEX crude oil held steady in the overnight market after yesterday's buck-and-a-half sell-off to $76.02 a barrel. Much of last night's buoyancy was due to short covering, as traders consolidated some of the week's decline. Nearby prices for U.S. benchmark West Texas Intermediate-grade crude fell $3.70 a barrel, or 4.6 percent, since last Tuesday. NYMEX's nearby crude contract is now testing its 50-day moving average at $75.26 a barrel.

 

Nearby NYMEX WTI Crude

 

Traders weren't the only bears in the oil market this week. Sell-side analysts, for their part, anticipated that today's weekly oil inventory report from the U.S. Energy Department would show a 1.5-million-barrel build. The industry-supported American Petroleum Institute guessed a 3.4-million-barrel addition. As it turned out, Street estimates were closer to the mark. Energy Department figures show commercial crude oil inventories increased by 1 million barrels from the previous week

The Street was looking for a modest 300,000-barrel increase in gasoline stocks, in line with the 1.4 percent year-over-year decline in gasoline demand reported by MasterCard. API estimated a 1.7-million-barrel build. The government's numbers reflected a middling increase of 1 million barrels last week.

Government figures show motor gasoline demand-measured over a four-week period, has increased 0.5 percent from the same period last year, while distillate fuel demand, including diesel and heating oil, is down by 9.5 percent.

Forecasts for distillate inventories varied widely this week. Oil Patch watchers thought stocks would remain flat or maybe get drawn down 100,000 barrels from the previous week's levels, but API thought a more dramatic 2.4-million-barrel off-take was more likely. The Energy Department actually reported a 500,000-barrel draw in distillate fuel supplies.

 

NYMEX Product Cracks

 

According to the Energy Department, refinery capacity utilization rose 0.9 percentage points, compared with industry calls for a 2.6-percentage-point increase and Street estimates of a 0.3-percent hike. Refineries actually operated at 80.3 percent of capacity last week, as daily gasoline production increased to an average 9.2 million barrels while distillate fuel production decreased to an average 4.0 million barrels per day.

Refining margins were fluid this week. While still favoring middle distillates like heating oil, wintertime refinery run profits were trimmed: The spread between product cracks this year is much tighter than in the previous three winters, reflecting refiners' attempt to maintain attractive product pricing in a low-demand environment.

 

NYMEX-Implied Refining Margins

 

On the flip side, refiners with storage capacity are looking to make a few bucks from a carry trade that's developed this week. Three-month NYMEX spreads have widened to an average $2.40 a barrel vs. $2.07 last week. That's created an enticing annualized cash-and-carry yield of 3.6 percent-much better than credit market returns.

Stocks of WTI continue to build at the Cushing, Okla., terminus. Heavier North Seas Brent crude is now trading at a 91-cent-a-barrel premium to the U.S. benchmark, reflecting refiner preference for lower gasoline yields.

Technical indicators remain bearish for NYMEX crude. A break by the January contract below its recent low of $75 puts the 50 percent retracement level of this fall's rally at $74.37 in sight of the bears. A close above Monday's high at $79.92 would confirm that a short-term low is in.