Oil Inventories Falling According to API

Jim Brown
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Late Tuesday afternoon the weekly API inventory report showed that crude inventories in the U.S. fell another 3.7 million barrels compared to the expectations for a two million barrel decline.

Crude prices rose to nearly $75 in overnight trading after the API news broke. If the EIA report concurs on Wednesday morning that would be the third straight week that inventory levels fell by at least 3.7 million barrels.

This would be a major new trend and bullish for prices. A surge in distillates including heating oil and jet fuel were responsible for the declines in crude levels last week. The colder weather in the northeast was prompting homeowners to stock up on heating oil and airports and airlines were preparing to consume more fuel flying heavily laden planes over the holidays.

Crude imports also dropped sharply in the prior week by 365,000 bpd to 7.8 mbpd. This was the third consecutive week that imports have declined and the amount of decline is without precedent in recent decades. For the same week in 2008 we imported over 10.2 million barrels. For the last week there was a prolonged fog in the Houston ship channel and that could have impacted deliveries of imported oil. In the chart below from the EIA the red line is the current import trend on a four-week moving average. Last week's imports were 7.8 mbpd, which would be off the bottom of the chart is plotted week by week. The dip in the blue line from 2008 was the result of 6 hurricanes and tropical storms in late September and October. This disrupted shipping for weeks. Plus the U.S. financial system was imploding and refiners were slashing imports because they were unsure if they could pay for them.

The chart below shows the crud oil inventories in red and a confirmed drop in the EIA report on Wednesday could finally bring current levels down into the 5-year average. They would still be at the high end and considering our current demand still be excessive.

The current inventory levels and the current demand do not support $75 oil. The current price of oil is related to the weak dollar, a growing security premium because of Iran and now worries that production from Nigeria will again decline due to rebel attacks.

Jim Brown