Weekly Inventory Analysis: EIA release of 9th January

Summary of last weeks’ change in Crude Inventories figures:

API: +2.36 mb

EIA Consensus: +2 mb

EIA actual: +1.31 mb

Last weeks’ oil inventory reports came in either side of the consensus expectation of around a 2 million barrel increase, with the API release showing a crude stock increase of 2.36 mb while the EIA release was 1.31 mb. Despite the official EIA release showing a lower stock build than the market expected, the detailed EIA release contained a number of bearish indicators that caused an immediate slip in the markets for both WTI and Brent.

The Breakdown

Although crude inventories, now at 361 million according to the EIA report, are at their lowest point since September, there were a number of negative signs relating to crude and crude-product demand in the US, as well as signs that high domestic production continues to supply the inventory overhang.

Both gasoline inventories and distillate inventories (heating oil, diesel etc.) increased far more than consensus expectations, countering higher gasoline prices earlier in the week which had implied supply may have dropped. This news of high product stocks, coupled with the fact demand for gasoline dropped to the lowest point since March and refinery output had fallen, pointed to the conclusion that demand for crude supplies would be falling over the coming weeks.

While imports into the US did rise last week, which would be a positive sign for Brent-indexed international crude, it was not enough to make up for the large drops in demand from the world’s largest energy consumer. Additionally this news reinforced the point that with the Seaway Pipeline reversal now in place, a potential 3.5 million barrels of WTI extra a week is now available to US refiners.

How Markets Reacted

Unsurprisingly from the all-encompassing bearish news, both Brent and WTI markets reacted negatively in the immediate period following the EIA release (10:30EST, 15:30 GMT). This example therefore reinforces the point made in last week’s analysis that one should not trade off the headline alone, which showed crude inventories had increased less than expected. Rather, markets react to what they see as future demand and supply potential. With gasoline and distillate inventories high refiners may cut their production to some extent to ensure they maintain a reasonable margin on products produced, and political issues may continue to spook consumers, and therefore demand, over the coming weeks.

As the one-minute charts below show, both grades saw an immediate negative reaction followed by a slight retracement. This retracement, common at the beginning of market trends whether on a day or 1 minute granularity, then led to a further fall for both grades. Hence in this case for a very short-term trader shorting either of the products after the price had fallen through the resistance at which the grades had previously retraced, $93.20 & $111.50, would then have led to small profits on closing of the position at a minimum buy-back price of $92.70 and $111.10 respectively.

This week’s release

Last weeks’ release showed the inventories at Cushing, Oklahoma had increased to their highest historical level. With the Seaway Pipeline extension now complete, it will be interesting to see in the what effect this will have on inventories in the region. While a whole week effect will not be seen until next weeks’ EIA release, more bearish demand data from the US will be particularly bad for Brent due to the lessened US import demand.