Traders Holding Their Breath

Jim Brown
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Traders who are still long crude after the strong rebound earlier this week are holding their breath overnight ahead of the EIA inventory report due out on Thursday at 11:AM. The API report on Wednesday gave us clues that the EIA report could show sizeable gains.

The API inventory report showed crude inventories slipped by only 63,000 barrels over the last week. That may not sound like a big deal but in the highly volatile week to week reporting that is a key point ahead of the EIA report.

You may remember last week's API report that showed an increase in crude inventories of 7.2 million barrels. The odds for a decline this week were strong since timing is always an issue in the reporting. Each week tends to be different than the week before whenever there is a big swing.

Since API inventories did not decline it suggests the inventory was really there and not just a timing issue on when the counts were reported. The EIA inventory report last week only showed a gain of 2.4 million barrels to a total of 331.4 million. The API total was 337.6 million. Since they both collect the same data with only a difference in timing, they should both report the same numbers over time.

They actually do report the same numbers within reason. For instance if the API reported 100 barrels this week and the EIA reported 97, it would be reasonable to expect the EIA numbers to rise if the API numbers did not change from week to week. The EIA would eventually catch up to the API.

This is the setup for Thursday's EIA report. The EIA reported 6 million barrels less last week and the API did not back off their 337 million barrel number this week. This suggests the EIA report should show a sharp gain.

Also on Wednesday the API reported that inventories of distillates and gasoline both rose substantially for last week. This will be negative for refining margins if the EIA report confirms those gains.

Gasoline demand fell to the lowest rate in the last 16 months last week according to the MasterCard Spending Pulse report. Consumers bought 8.84 mbpd in the week ended Feb 12th. This was nearly 15% below normal. The drop in demand was due to everyone in the northeast being snowed in for three days and unable to drive.

The dollar rebounded on Wednesday and recovered all of its loss from Tuesday. The Euro retreated and gave back all its gains. Each currency completely erased its move from Tuesday but oil prices did not decline despite the rally in the dollar.

This makes oil overpriced relative to the dollar in the short term and should the dollar continue higher on Thursday it should pressure oil prices to return to the lower $70s.

The March crude contract will expire on Monday so the profits from the early week rally are at risk. Traders long the contract will need to exit those positions before Monday's close.

Jim Brown