Weekly WTI Crude Oil Inventory Analysis: EIA release of 27th March

Summary of today’s release: last weeks’ change in Crude Inventories figures:

API: +3.7mb

EIA Consensus:  +1.3mb

EIA actual: +3.3mb

A mixed inventory report was released today, showing a large build in crude inventories of 3.3mb, a whole 2 million barrels above survey expectations. While stock gains were large, markets were supported by the fact that refinery runs stepped up a gear in response to the upcoming spring gasoline refinery season, and a fall in distillate stocks led some to believe that prices for the products could rise over the coming weeks.

The Breakdown

The main bearish points of the report came from the large inventory increase, with 4 of the 5 PADD districts seeing increases. In particular the Gulf Coast saw a 1.5mb rise and Cushing a 439,000 barrel increase. As the graph shows, it’s normal for the Gulf Coast to see such a build at this time of year (represented by the red lines), but it’s also important to watch out for potential supply gluts forming in the area as new pipelines transport US produced crude to refineries that will eventually reach full capacity.

Positive signs came from refinery utilisation levels which jumped 2.2%pts to 85.7%, with net crude inputs increasing by 364,000 b/d. This was combined with a drop in distillate inventories of 4.5 mb, equal to a 4% fall, as well as a fall in gasoline stocks of -1.6mb. Such falls increase the outlook for higher prices and more production, particularly in the distillate market where stocks haven’t been this low for this time of year since 2008. Demand in the distillate produce market has also increased, with 642,000 extra b/d being supplied to wholesalers last week.

Such demand for heavier crude products could help explain the jump in crude imports last week, with 841,000 b/d extra being imported. Such an increase is likely to have all come from heavier blends of crude, the likes of which US are refiners are better set up to process and of which yield higher levels of heavy crude products. This goes to show that despite massive increases in US production of the last year, product producers continue to rely on imports.

How Markets Reacted

Prices for both WTI and Brent rose slightly on the news, with WTI up $0.24 and Brent up $0.44 by the end of US trading. Such a result shows that markets reacting positively to the EIA release, with other market forces, in particular a bearish European confidence report and a drop in the euro, normally resulting in losses for oil.

Next week’s release

There’s been plenty of talk in the markets this week that the Brent-WTI premium will continue falling, but I believe one of the key charts in an argument against this theory is the days supply chart that I provided a few weeks ago, as shown below. The chart shows days supply is almost 2 days higher than any year in the last 10, and based on normal patterns might not peak for a few more weeks.

Such a scenario makes a sudden market reaction to a future inventory report more likely, as we saw back in January when the Brent-WTI spread widened rapidly after evidence that the Seaway pipeline reversal did little to alleviate supply bottlenecks. Such a situation could happen again if we get confirmation of the effects of various pipelines over the next few weeks not alleviating supply gluts, or if a supply glut appears elsewhere in the system. Hence look out for regional stocks over the coming weeks, in particular at Cushing and the Gulf Coast.