Crude Oil and Gasoline Plentiful; Heating Oil Not So Much

Real-time Monetary Inflation (last 12 months): 1.8%

Oil traded near a 14-month high on the NYMEX ahead of a government report forecast to show heating oil supplies falling in the wake of the East Coast's coldest winter in three decades.

Crude oil and product prices settled higher Tuesday, driven by concerns for continuing cold weather. Domestic heating demand is expected to soar 21 percent above normal, according to the National Weather Service, as Arctic air spreads south from Canada.

February NYMEX crude was at $81.43 a barrel, down 34 cents, in electronic trading ahead of the Energy Department's weekly inventory report this morning, but rebounded to break-even levels as dawn approached. Yesterday, the contract rose 26 cents, or 0.3 percent, to $81.77, stretching oil's winning streak to nine days, its longest since July.

Inventory Predictions And Reality

Oil futures had fallen back after data from the American Petroleum Institute indicated a surprise increase in overall distillate stocks, though supplies of heating oil, a significant component in the category, appeared to have fallen.

API figures forecast domestic crude stocks declining by 2.3 million barrels, distillate supplies dropping 962,000 barrels and gasoline inventories jumping 5.6 million barrels. Heating oil stocks were seen dipping 1.3 million barrels.

Meanwhile, forecasts of crude oil inventories by sell-side analysts were mixed, ranging from a build of 200,000 barrels to drawdowns between 500,000 and 1 million barrels. Among Oil Patch watchers, guesstimates for distillate stocks-a decline between 1.9 million and 2 million barrels-and for gasoline-a 500,000-barrel build-were more consensual.

When the Energy Department's report was finally released this morning, neither the industry trade group nor the analysts ended up winning the Trifecta. Crude oil stocks were boosted, in fact, by 1.3 million barrels, leaving supplies above average for this time of year. Distillate fuel inventories decreased by 300,000 barrels but are, like crude oil supplies, above normal. Gasoline stockpiles were built up by 3.7 million barrels, pushing the upper limit of the fuel's average seasonal range.

The Week In Review

For the week, crude prices bobbed up 3.7 percent, gasoline costs rose 4.3 percent and heating oil was lifted 3.6 percent higher. Crack spreads widened this week, boosting refining margins to 10.8 percent for gasoline-heavy 3-2-1 operations and to 11.4 percent for distillate-rich 2-1-1 mixes. The wider margin for the wintertime mix was reflected in the expansion of the premium commanded by lighter WTI crude over North Sea Brent. WTI's per-barrel cost was $1.80 higher this week, compared with a premium of $1.55 last week.

Analysts had forecast refinery runs to tick up to 80.8 percent from last week's 80.3 percent utilization rate, but government figures show operations running at only 79.9 percent. Gasoline production increased last week, averaging 9.1 million barrels per day, while daily production of distillates increased to an average 3.8 million barrels.

Fuel production is being stair-stepped down as refiners ready for the first-quarter maintenance period.

Overall gasoline demand is up by 0.3 percent from the same period last year, while distillate consumption is down by 1 percent.

NYMEX 3-Month Contango Vs. Oil Supply

The three-month NYMEX futures roll eased to an average $1.83 a barrel this week, vs. last week's $2.02 contango.

The Technical Picture

Open interest has been building behind oil's recent price run-up, rising 52,000 contracts, or 4.2 percent this week. Daily volume has doubled from pre-holiday levels, but is still lighter by half compared with mid-December levels.

NYMEX Nearby Crude Oil

The recent price run-up has pushed February NYMEX crude into overbought territory, though technical indicators such as MACD, RSI and stochastics remain positive. After a successful retest of the $71 level last month, the February delivery's next objective is the October high at $83.19. Support for the move is at the 10-day moving average at $78.18.

Closes below the 20-day moving average at $75.85 would indicate a short-term top is in.