Directional Agreement

Jim Brown
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The API and EIA agreed in principle but those pesky details continue to get in the way. The drop in crude supplies pushed prices to a new two-year high.

The API inventory report out on Tuesday night showed a massive -7.4 million barrel drop in crude levels. Crude prices failed to rally much on Tuesday night because nobody believed the API numbers.

When the EIA reported on Wednesday that they saw a -3.3 million barrel drop there were enough believers to push prices to $88.35 and a new two year high. The falling dollar also helped provide support.

The EIA and API reports rarely agree and one can show a gain while the other shows a decline. On weeks that they agree on direction they rarely agree on the numbers. Those pesky details like inventory levels just seem to allude them.

Inventory Reports

However, Wednesday's EIA report may not have agreed with the API in specifics but it did agree in direction and it was enough to push prices higher. Strangely analysts expected both reports to show gains of 1.5 to 2.0 million barrels.

We are starting to see a disturbing pattern develop. Crude inventories are 8.1% higher than a year ago but distillates are not 4.7% LOWER than they were a year ago. Gasoline actually declined below year ago levels for the first time since July 2009.

Is it escalating demand or a drop in refining? While traders are betting on demand I believe it is the drop in refining. We have seen the refinery utilization decline to nearly 81% over the last several weeks as plants shutdown for maintenance and conversion to winter fuel blends.

Plus crude prices are at record levels but gasoline prices have not risen as much as crude. This means the crack spreads will narrow as the price of crude rises. Crude price are up +10% since the end of October but gasoline prices are up just slightly over 5%. There is no incentive to refine crude until the prices swing back into correlation.

Secondly the colder weather has caused an uptick in purchases of heating oil, which draws down the distillate inventories.

I would like to think that demand was increasing sharply but I don't see it yet despite the drop in inventories. I believe this is a combination of circumstances and calendar timing of refinery maintenance as well as a drop in imports of roughly 500,000 bpd last week. That could be two VLCC carriers that were delayed for some reason for a couple days.

Add in the falling dollar and it was a good day for oil prices.

Goldman Sachs helped fuel the rally saying, "oil prices will be substantially higher by 2012." Goldman said spare capacity in OPEC would decline do to escalating demand in Asia.

Jim Brown

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