The API inventory numbers on Tuesday night showed a drop of -3.7 million barrels but the more widely respected EIA numbers on Wednesday showed a much sharper decline in crude levels of -4.8 million barrels.
The sharp EIA drop was much worse than the -1.6 million decline expected. Not only oil declined but distillates fell by -3.1 million compared to estimates for a 2 million barrel decline. Gasoline inventories fell by another 0.9 million barrels. Refinery capacity utilization was unchanged at 80%.
Crude oil imports, which I discussed on Tuesday, fell again for the fourth consecutive week to a six-year low. Imports declined by another 65,000 bpd to average 7.7 million bpd. There is no precedent to the sharp decline in imports.
One reason why imports are so low could be the tax man. With year-end only a week away refineries are probably letting inventories decline as low as possible to avoid paying taxes on inventory. Having an extra 4-5 million barrels of oil in your tanks at year-end at $75 per barrel creates a monster tax bill. Waiting to take delivery in January avoids those taxes.
The spike in distillate demand is directly related to the cold weather in the northeast and the demand on heating oil. Demand last week was the highest since March. Even with the sharp -3.1 mb decline inventories are still 19.2% above 2008 levels. Weak consumer finances has caused people to put off buying heating oil as long as possible and now they have to bite the bullet and pay up.
The sharp drop in crude inventories caused prices to spike more than $2 in regular trading to $77.48. In a Bloomberg survey of 27 analysts 13 of them said crude futures will likely gain through year-end. This was the most bullish monthly survey since June.
Several analysts are calling for $90 oil in 2010 because of increased demand from China and India. An RBS analyst said they expect $78-$80 in early 2010 with $85 or higher by year-end.
Also pushing oil prices higher is the sudden drop in the dollar. After a two-week rally to 78.49 on the dollar index it has fallen to 77.59 overnight on Wednesday night. This will push oil prices higher if the decline continues.
Analysts are starting to upgrade parts of the oil sector ahead of expected demand increases next year. However, Exxon and Chevron were downgraded because of their over exposure to refining and product mix. Schlumberger was upgraded as being in the right place to benefit from an increase in offshore drilling over the next 24 months.