Weekly WTI Crude Oil Inventory Analysis: EIA release of 3rd April

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

API: +4.7 mb

EIA Consensus:  +2.2 mb

EIA actual: +2.7 mb

A mostly bearish oil inventory report was met strongly on the downside by an overbought oil market, prompting a strong correction today for both WTI and Brent prices. The headline stocks increase resulted in a rise in inventories to their highest level in 22 years, and this combined with a generally negative sentiment across markets to result in the highest daily loss for oil markets in 2013 so far.

Detailed Breakdown

Markets have previously reacted positively to overall crude inventory rises so long as stocks at Cushing had fallen. However this was not the case today; Cushing supplies dropped by -287,000 - now 2.68 mb below the peak in early January. Instead increases came from other parts of the Midwest, PADD2 region, as well as the Gulf Coast. Part of the drop in stocks at Cushing can be attributed to the current filling of the longhorn pipeline, which must be done before oil gas actually be transported to refiners and has diverted some of the flow from Cushing. However media also reports oil is now being trucked out of Cushing to connect with rail and water transport.

The fine details of the report actually had several positive, albeit subdued, signs; refinery utilisation increased 0.6%pts to 86.3% and demand for gasoline rose 1.5%. A fall in distillate stocks despite lower demand and higher production also implied a healthy export market for refiner’s products. Day’s supply, which measures the stock level of crude compared to current demand, also dropped by 0.3 days despite the increase in stocks due to the rise in demand for crude from refiners. Hence this provides support to the idea that markets were making an overdue correction today rather than responding specifically to this one report; markets after all should react to the differences in demand and supply level, indicated by day’s cover, rather than an absolute supply level.

How Markets Reacted

As mentioned in the last few weekly report summaries, in the past few weeks markets have been picking up only on positive aspects, rather than to overall supply fundamentals. This week a correction has finally occurred with prices falling sharply, furthermore the strong level of momentum behind this indicates the trend could continue tomorrow; Brent fell -3% with trading volumes double their normal level, and WTI fell -2.8% (see chart below) with trading volumes over 30% higher.

While technical indicators were already giving overbought signals before the EIA release, it tends to take a strong showing of fundamental messages to spur the market into such a strong fall and indeed the bearish EIA report coincided with bearish economic indicators out of the US. Some level of acceptance that a geopolitical risk premium has been seeping away may also have contributed to the negative price momentum, with some analysts citing this as a reason to lower price forecasts.

Next week’s release

This week’s closure of the Pegasus pipeline, which links Midwest crude storage to Texan refineries, could add pressure to stocks next week. The pipeline normally carries 90,000 b/d of heavy Canadian crude, rather than light US produced crude, and therefore may not have an adverse effect on the US WTI prices.  Key details to look out for will be product demand, which will need to carry on increasing if supply gluts are not simply going to be transferred to other regions as pipeline infrastructure improves.