Weekly WTI Crude Oil Inventory Analysis: EIA release of 17th April

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

API: -6.7m

EIA Consensus:  +1.2m

EIA actual: -1.2m

Crude continued its bearish run today, with both grades dropping by more than 2% in the face on an EIA report that continued to remind traders of the fragile demand and supply situation in the US. While overall crude stocks dropped, the cause of this fall seemed to be a reduction in imports rather than an improving US demand situation. Indeed, the detail showed that US domestic production had increased while refinery input decreased. These factors, combined with a large stock-build at Cushing and a fall in distillate and gasoline products supplied to consumers, reinforced the current bearish outlook.

Detailed Breakdown

US domestic crude production climbed 27,000 barrels to reach 7.2mb/d last week, while net refinery input dropped by 40,000 b/d. The fall in refinery input only represents a 4% drop in the gains seen over the preceding 4 weeks, and could be a result of the continued softness of crude product demand in the shoulder period between winter fuel and summer gasoline peak demand. Such a demand situation was confirmed in this release, with gasoline product supplied falling by 94k/d and distillate fuel by -226k/d.

The bearish reaction to the drop in stocks may also have been caused by details in the regional breakdown. Despite the -1.2mb fall, the region that caused this decline was the demand heavy West Coast, where stocks fell by -1.8mb. Meanwhile, there was a 1mb rise at Cushing, with stocks there reaching the highest point since January. With a lot of traders focussed on transportation bottlenecks, such a sign is worrying as it implies crude might be finding its way to Cushing but not onward to the Gulf Coast. Such an idea may have been affected by the recent completion of the line-fill of the Longhorn pipeline, which was completed last week. This process was taking up some crude from the system, but actual deliveries are not expected until this week, and so this could have caused the temporary build-up (For more on that see my previous post Seaway No Solution).

How Markets Reacted

Brent has been on a bearish run since 2^nd April, when the grade reached $111.8 before dropping by $14.1 to end today at $97.7. WTI began its bearish run a few days earlier, falling from $97.7 to reach just under $87 today. Clearly there is a bearish sentiment in the market, and as in other weeks we’ve seen market reacting positively despite a negative headline number, this week we see markets reacting negatively despite a positive headline number.

As the chart shows, the Brent price initially ticked up slightly at 14:30 GMT after the release, but soon dropped by about $0.90 as analysts saw the details and continued to drop by a further $0.5 before rebounding slightly after the European closed. WTI followed a similar pattern, and both grades dropped on the day.

Outlook: How Low Will It Go?

US production reaching a 20-year high was hailed as a major headline by some news outlets, but in reality we already saw that headline a few weeks ago, and will likely continue to see it this year. As regular followers of the EIA report will know, the details can be overshadowed by the current market sentiment, with what we’ve seen over the past two weeks of a bearish market possibly being a correction to the previous weeks in which crude has increased endlessly despite bearish details and a loose market. Hence it’s difficult to predict next week’s release, but crude will likely rebound at some point, albeit perhaps temporarily.

In particular, technical indicators such as the RSI show that WTI could be due a rebound before the end of this week. As the day-chart below shows, WTI has reached a new low while the RSI has failed to reach a lower low than the one two days ago. This is known as an RSI bullish divergence, as detailed in my previous post of technical trading strategies.

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. 

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.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 20th March

Weekly WTI Crude Oil Inventory Analysis: EIA release of 20^th March

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

API: -0.4mb

EIA Consensus:  +2mb

EIA actual: -1.3mb

US crude inventories dropped by a surprise -1.3mb last week, against a consensus forecast for a rise of 2mb. The fall was a result of a -2.7mb drop on the West coast, which is often discounted from US models due to its isolation from the rest of the country in terms of oil transportation. Without this drop, inventories actually rose.

The Breakdown

While a fall in West Coast stocks caused the positive headline number, inventories at Cushing also declined for the second week running. With new pipelines coming in to place next quarter (See Seaway No Solution), signs stocks are already dropping provide a bullish view for the market. Gulf coast stocks continued to rise, which is normal for this time of year, although EIA watchers should continue to observe the region to watch out for a possible supply glut transfer from Cushing to the Gulf coast.

US production dropped slightly, and as the production chart below shows the trend has certainly slowed in the last month. The production change can produce headline effects if the increase in large, and so such a sign provided support for crude fundamentals. Likewise refineries ramped up their through-put and utilisation which could be the start of the spring production upturn. Such a thought was given support by the sixth week of gasoline stock withdrawal, providing room for absorption of further future production.

While refineries may have increased their demand, total crude product and in particular gasoline demand did fall. The time series is quite variable, but may nevertheless spook some traders given demand that low had not been seen since early January. On the other hand support for US crudes was provided by imports dropping, and as the chart below shows, the 12-week MA for this series is clearly on a downward trend, reaching lower and lower lows.

How Markets Reacted

The individual market reaction to this release is hard to pin point, given the strong market reaction to the euro area situation in Cyprus as well as the announcement by the Federal Reserve today that the monetary easing program will continue. Overall, the bearish components of rising stocks in a non-West Coast sense as well as a fall in product demand did not seem to detract from otherwise bullish sentiment in afternoon trading, although WTI then dropped off again in the late US afternoon session, ending the US trading session -0.1% down.

Next week’s release

The main point to watch next week will be Cushing supplies, as the completion of the Longhorn pipeline reversal should mean some crude deliveries to the Gulf Coast can bypass the mid-West hub, which would buoy WTI markets and possibly result in a large narrowing of the Brent-WTI premium. At the same time look out for a possible correction next week if we see two consecutive weeks of gasoline demand falls. Indeed, such a result is possible because of the cold weather and snow in the North East Coast of USA this week, which could reduce demand there.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 27st February

Summary of last weeks’ change in Crude Inventories figures:

API: +0.9 mb

EIA Consensus:  +2.5 mb

EIA actual: +1.13mb

Markets perceived this week’s EIA report as positive, with total US crude inventories increasing by 1.4 mb less than expected. In addition to this, a number of key details in the breakdown provided support for WTI prices; both refinery input and end-product demand were positive and US domestic crude production fell slightly.

The Breakdown

While high gasoline stocks and low refinery utilisation are normal for the beginning of the year, the current patterns nevertheless spooked markets to some degree, particularly due to US consumer’s disposable income being cut in the New Year’s payroll tax rise. Fears were somewhat dissipated in this week’s release as the EIA report showed wholesale gasoline demand increased by 160, 000 b/d and refinery utilisation increased by 2.2%pts to 85.1%, with much of the increased production in gasoline.

It was not just demand side signals that were positive; supply details provided some market support 

also, with US crude production falling 22,000 b/d after 4 consecutive weeks of growth. On top of this, inventories at Cushing, the main focus point of the supply glut, fell by 75,000 barrels. Instead much of the increase in inventories came from the Gulf Coast PADD 3 region where stocks increased by 1.1 mb to 174.6 mb; such a build-up is again normal as refiners start stockpiling for spring and summer gasoline production, although this region will be the one to watch in Q2 and Q3 as new pipelines begin to move more and more crude from PADD 2 and Texas (See Seaway No Solution).

How Markets Reacted

Real-time market reaction to the release was insignificant, with WTI remaining in the $92.7-$92.8 range in the hour after the release as the graph below shows. The grade eventually ended up on the day, with further support also coming from positive US economic releases from durable goods orders and pending home sales.  

Next week’s release

If the positive US economic signs remain true, we should see gasoline production and demand both increasing next week. However such results may be hampered by the effects of the US fiscal sequestration, the coverage of which may have led some to cut back on spending, regardless of whether these cuts are prevented or not.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 21st February

Summary of last weeks’ change in Crude Inventories figures:

API: +3 mb

EIA Consensus:  +2 mb

EIA actual: +4.14 mb

An overall bearish EIA release exacerbated an already negative sentiment in crude markets today, with oil inventories increasing 2 mb more than analysts forecasted. On top of the headline number, a second consecutive large gain in US crude production once again highlighted a market that is fundamentally oversupplied.

The Breakdown

Following last week’s 1% rise in US production, this week saw another large rise of 0.8% or 54, 000 b/d. Production now stands at the highest point since August 1992 and is experiencing its fastest growth rate in the recent uptrend, allowing for outlying events.

This large uptick in production comes at a time when seasonal demand for crude is normally low, confirmed by the fact that refiners once again reduced their crude inputs, this week by a gross rate of 170,000 b/d. This decline resulted in a utilisation rate of 82.9%, 0.9%pts down from last week. While a low rate is normal for this time of year, as shown on the chart below, the effects for crude demand and thus prices are nevertheless on the downside.

The amounts of petroleum products supplied demonstrated the reasons for low refinery utilisation, with distillate fuel oil supplied, which includes heating oil, falling by -134,000 b/d after last week’s drop of -31,000. This contrasts to the amount of gasoline supplied which has been on average flat for the last four weeks, experiencing modest fluctuations. Due to seasonal demand, gasoline supplied may not increase dramatically until the spring and summer driving seasons.

The fundamental oversupply of the market is well demonstrated by the above-average level of ‘days-supply’, representing how many days the current inventories could fuel the US economy. As the chart shows, while an increasing DS is normal for this time of year, the level and rate of increase is the last few weeks is the highest amount in the last 10 years.

On a regional level, stocks at Cushing were seen to increase by 417,000 barrels, but by the far the biggest increase is inventories was seen on the Gulf State where stocks rose by 3.469 million. Such a rise is normal for this time of year, as stocks were depleted for a mixture of both tax purposes in the run up to January as well as for use in heating fuel production. However while Gulf states are still about 2 million barrels below the point they normally reach in the summer, inventories of the Gulf Coast will likely play a high part in analysis over the coming months as various pipelines from the current supply glut in the Midwest are completed (see my previous post, Seaway No Solution, for more detail)

How Markets Reacted

Markets were already in a downward trend after losing a large amount of ground yesterday, caused by a number of factors including rumours that a hedge fund was liquidating a large position, minutes from the FOMC meeting showing that monetary authorities believe the time for QE may be coming to an end, the API report coming in as an increase in inventories and the fact that a major technical support level was breached, thus triggering sell orders.

While it might be thought that the bearish EIA report was a justification of this downward trend, the WTI graph below shows that the price actually increased slightly on release at 11am (chart in US time). Despite an increase of up to $0.60, the price eventually fell back down an hour later.

Next week’s release

While demand signs were the main focus of markets from EIA releases in the first few weeks of the year, supply concerns have truly come to the foreground since the beginning this week. Indeed if production carries on increasing at the dramatic rates seen in the last couple of weeks, the WTI-Brent differential may face further divergence as demand for the excess crude simply does not exist at this early stage in the economic recovery. Hence this could be a key concern in next week’s release.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 13th February

Summary of last weeks’ change in Crude Inventories figures:

API: -2.3 mb

EIA Consensus:  +2.2 mb

EIA actual: +0.56 mb

A rise in US crude stocks of 0.56 mb combined with an increase in domestic crude production was interpreted as a bearish sign for US crude, and WTI fell in todays’ trading. Brent however rebounded from initial losses on increased forecasts for global crude demand for the International Energy Agency.

The Breakdown

After two weeks of US domestic crude production remaining almost flat, a rise of 1% this week was the main focus of the report as daily production breached the previous highpoint in the upward trend that has been increasing almost uninterrupted since September , all in all production now stands at the highest point since December 1992, as shown below.

Further negative signs for crude came from a further drop in refinery utilisation and crude inputs, with the utilisation rate falling 0.4%pts to 83.8% and input falling by -121,000 b/d. Although refiner demand was weak, products supplied to wholesales saw considerable growth of 996,000 b/d, representing an increase of 5.5%. While there was a modest fall in gasoline supplied of 0.1%, distillates supplied saw an increase of 8.7% and “other oils”, representing a variety of industrial products and feedstocks , jumped 22.8%, although the series is particularly volatile.

Despite the modest drop in gasoline products supplied, the reduction in refinery utilisation led to a fall in gasoline stocks by 803,000 barrels/-0.2%.  As the graph below shows, stocks are traditionally high at this time of year but may now have plateaued. This would be a good sign for future refinery demand as gasoline producers try to maintain lower stocks in order to maintain a higher profit margin.

Crude imports carried on declining in a trend that we should continue to see as sweet crude imports are replaced with domestically produced grades, providing logistical capacity increases (look out for a post this weekend discussing this point further).  On this point, despite the overall increase in crude stocks, the regional breakdown showed crude at Cushing dropped 1.1 Mb to 50.2 MB, with the rise in stocks coming from the PADD 3, 4 & 5 regions (Cushing is in Padd 2), showing crude has indeed been flowing to key refinery regions.

How Markets Reacted

Despite markets being focused on Cushing inventories in the last few weeks, there has been some debate as to whether a fall in the glut at Cushing will enable more US crude to be processed or whether gluts will simply develop elsewhere. This thinking may have been behind the fact that despite inventories at Cushing decreasing, markets did not react positively because of the belief refiners will reduce the price they pay for crude due to the build-up of stocks in those areas. What’s more, with US production resuming its upward trend, increasing levels of refinery and pipeline capacity will be needed to process ever more crude.

Indeed, because of this perception, WTI fell by around $0.50 in the half hour following the release, and was unable to rebound throughout the day, instead declining further after the end of UK trading.

Brent meanwhile managed to rebound from its fall, making up losses experienced in the period following trading to end the day $0.13 up on the back of momentum developed from higher global demand forecasts from the IEA.

Next week’s release

Breakdowns from the EIA report are particularly volatile due to the nature of the industry, but trends can be seen particularly in US production as the chart above showed. With markets shifting focus from the Cushing tunnel-vision that characterised the last few weeks, next week’s focus will likely be on production numbers again, with analysts also looking to see how stocks in key refining regions develop, with higher stocks likely to prices for WTI fall regardless of developments elsewhere.

Weekly WTI Crude Oil Inventory Analysis: EIA release of 6th February

Summary of last weeks’ change in Crude Inventories figures:

API: +3.6 mb

EIA Consensus:  +3 mb (Platts)

EIA actual: +2.6 mb

A fall in inventories at Cushing was the highlight of this week’s EIA report, with stocks falling by 315,000 barrels at the Oklahoma terminal. Despite rising crude stocks nationwide and a report that contained a number of negative factors, crude was nevertheless mainly buoyed by this positive regional highlight and both WTI and Brent prices increased in the hours after the release.

The Breakdown

Refinery activity remained subdued last week, with utilisation rates falling -0.8%pts to 84.2% and gross crude inputs decreasing by -132,000 b/d. While utilisation rates are typically low this time of year due to seasonal maintenance, the numbers are nevertheless negative for short-term crude demand.

Total petroleum products supplied to the market saw a large fall of 629,000 b/d (-3.4%), but this was mostly attributed to propane and “other oils” (see EIA for definitions). The more commonly followed gasoline, which accounts for approximately 47% of total petroleum products supplied, saw a more modest decrease of -86,000 b/d (-1%), although this nevertheless was bad news considering the current large stocks of gasoline held. Indeed, inventories of gasoline increased by a further 1.738 mb last week, with the decreasing trend in stocks from the previous two weeks unable to be maintained.

Some respite came from a decrease in imports by 499,000 b/d in conjunction with another week in which US crude production remained fairly stable, increasing by just 4,000 b/d. The most positive sign for US crude prices came from stocks at Cushing, which declined by 315,000 barrels to reach a one-month low. This was despite news last week that the Seaway pipeline from Cushing to Texas had not been operating at full capacity due to bottlenecks in the system. Media reports that this drop in inventories could therefore have been due to buyers now using rail to transport crude, and companies such as PBF Energy have been increasing rail capacity at its refineries, as reported by Bloomberg.

How Markets Reacted

Both grades were on slightly negative trajectories in the short period up to the EIA release, with WTI facing a steeper downward trend then Brent in anticipation of further increases in inventories. Although such an increase did materialise, the fact that stocks at Cushing actually fell last week demonstrated that the negative market reaction to last week’s news Seaway pipeline capacity news may have been too strong, and WTI in particular rebounded.

The April contract for WTI was priced around $92.10 around 15:30 on Wednesday, and after the release began an upwards trend that resulted in an increase of about $0.70 in the following half an hour, with the grade reaching $97.30 before it started to retrace as traders took profits.

Brent struggled to trade convincingly in either direction in the first 10 minutes after the release, but soon began an upward trend in line with WTI. In total the grade managed a gain of around $1 before also retracing around 17:00 GMT.

Next week’s release

In previous weeks we have seen demand side signals from products supplied and refinery inputs overshadow large build-ups in inventories, with much of the inventory build-up deemed to be down to seasonal factors. Following this logic we may have expected a fall in oil this week as product demand and refinery input declined, but instead market sentiment seemed to be focused on signs that inventories at Cushing had decreased to a one month low. Having said this, US equities were also experiencing a positive day which may have explained some of the gain in oil. The key therefore to look out next week will be how inventories at Cushing have developed now rail is beginning to play a key factor, and if overwhelming supply can  once again be overshadowed by positive signs that this supply is at least making it to customers.

Weekly Inventory Analysis: EIA release of 30th January

Summary of last weeks’ change in Crude Inventories figures:

API: +4.2 mb

EIA Consensus:  +2.5 mb

EIA actual: +5.9 mb

Brent and Crude traded choppily last Wednesday on the back of an EIA release that saw crude inventories rise +3.4 mb above the expected number. Despite positive signs from refiners and consumers, the continuing rises in inventories in the US and in particular Cushing show that supply factors may be beginning to dominate once more.

The Breakdown

After the previous release showed a massive drop in refinery utilisation, it was a relief to see the gauge increase 1.4%ppts to 85% this week, with refinery inputs also increasing by 275,000 b/d after last week’s large fall. While the long term average utilisation rate is around 88.7%, it is normal to see lower rates at this time of the year.

Further positive signs were seen from a second consecutive fall in gasoline stocks as well as a fall in distillate stocks, which when combined with further increases in the demand figures for these two types of product points to signs that refinery utilisation and thus crude demand could continue to increase in next week’s release. 

Despite these positive signs, negative indications came from a rise in net imports and the fact that day’s inventory cover seemed to be ticking up at a faster rate than normal for this time of year: Net imports increased by 338,000 b/d, more than making up for the fall seen last week, while day’s supply, which measures how many days of crude demand current inventories could cover for, reached 25 days last week. This measure is typically cyclical as the chart below shows; however the black line indicates cover appears to be increasing sooner than usual, which demonstrates the extent to which supply is overwhelming demand at the moment.

Finally, despite these signs of overwhelming supply there was some consolation from that fact that US production remained roughly flat for the second week running, with production increasing just 4,000 b/d.

How Markets Reacted

Wednesday was a significant news day for crude, with both US GDP and a Federal Reserve meeting scheduled as well as continuing concerns of geopolitical events in the Middle East rearing their head. Under this backdrop, trading was choppy for the whole day but news outlets suggest an underlying negative sentiment from the inventories release despite the fact that prices for both grades increased.

WTI was priced around $98 at 15:30 on Wednesday, and as the graph below shows the bulls and bears fought for control of the market as the grade rose, slipped and then rose again so that by 16:00 it had actually increased to around $98.1 despite the negative headline number.

Brent saw similar action as the chart below shows, increasing by around $0.3 from around $113.3, before falling back down and then rising again. While Brent then seemed to increase slightly, this could be put down to geopolitical issues as news was released that French forces had hit a weapons convoy in Syria at a similar time on Wednesday (see Weekly Oil Summary).

This week’s release

The fact that this summary is a little late allows me to include reference to news late last week that it has been confirmed that the Seaway Pipeline has not been as effective as suggested at alleviating the WTI glut seen in Cushing. While some extra capacity on the pipeline has been used, we are now in the situation where one of the exit points at Jones Creek, TX has reached its storage capacity (see Weekly Oil Summary), and the pipeline has thus not been able to operate at the increased throughput of 400,000 bd. While WTI decreased 0.5% on this news, further negative news regarding inventories this week could see a much stronger reaction from the WTI price. While demand signs will continue to be a key focus for Brent, we could see a further disconnection between the two grades if inventories at Cushing are indeed seen to be increasing further, particular if US crude production begins another upward trend.

Weekly Inventory Analysis: EIA release of 24th January

Summary of last weeks’ change in Crude Inventories figures:

API: +3.166 mb

EIA Consensus:  +2 mb

EIA actual: +2.8 mb

Note: EIA data was released at 16:00 GMT on Thursday this week due to the US holiday.

An increase of crude inventories of +2.8 mb was more than the market had expected, but with a number of positive details in the breakdown both WTI and Brent saw gains after the initial release. In particular, gasoline stocks and products supplied were both positive for the market, and this release also confirmed the first draw of stocks from Cushing since November in what was the first full week of data available since the expansion of the Seaway Pipeline.  Overall the rise in crude stocks has been primarily due to a fall in refinery input, with both US crude production and imports falling.

The Breakdown

Refinery data showed that producers continued to cut production last week, with utilization falling 4.3 percentage points to 83.6%. While this drop was large, refiners have showed similar low utilisation rates in January in previous years, in line with the build-up of stocks also normally experienced.  This fall in utilisation was reflected by a fall in net crude input of -895,000 b/d, although the data showed refinery production of gasoline continue to rise while distillate production fell.

While input declined as refiners sought to pare the build-up of product stocks, there were positive signs in the demand side data which showed both total petroleum products and in particular gasoline demand had increased for the second week running.  With the increase in gasoline demand resulting in a fall in gasoline stocks by -1.7mb, there were signs that gasoline inventories, which have risen recently to a particularly elevated level, were beginning to plateau.  Hence this news will have been taken positively by the market.

Another positive sign for US produced grades was the fact that net imports continued to fall; this week by a further 301,000 b/d. Net imports are now 771,000 b/d lower than they were at the highest point in December, although the series is perhaps the most volatile of the weekly data.

While increased product demand and decreased imports seem positive for US crude blends, the latest US crude production data also showed a decrease. While the series is also volatile, the small fall of -52,000 b/d could suggest the rate of US production increase is decelerating, which would allow infrastructure providers greater chance to catch up with production that spiked massively in 2012.

How Markets Reacted

Demand signals have been closely watched in the midst of the US economic recovery and political clashes over recent weeks. Thus despite the headline crude number coming in at a higher inventory gain than expected, the positive elements on the demand were met well and both WTI and Brent increased in the period immediately after the EIA report.

WTI, which was priced around $96.60 just before 16:00, saw an immediate fall of 0.10 in the first minute after the release and then moved up to just over $97.70 before traders took profits. The grade then fell to a similar position to its starting point, however this was due to an announcement that the Seaway Pipeline was experiencing capacity problems and thus the ability to get oil from Cushing to refiners on the gulf coast was hampered.

Brent also followed a similar pattern but managed to hold on to its gains. Just before 16:00 the grade was trading at around $112.10, with increases taking the grade up to $112.50 experiencing a short correction and going on to trading in a range. While the grade flirted with the $112.40 line several times in the afternoon, it failed to maintain any gains past what seems be a strong area of technical resistance.

For clarification see the one-minute charts, price in USD cents, below.

Next week’s release

With the Seaway Pipeline operating under restricted capacity for part of this week, the release on Wednesday will show the full effect on inventories at Cushing. Having said this, it is reported some storage in the area is now completely full and so there may be a limit to how much stocks in Cushing itself can increase, with crude simply staying in other parts of the country.

In terms of the overall report, demand side factors will continue to be the main point of interest for markets, with increasing gasoline demand a trend that investors would like to see continue in the coming weeks. With gasoline stocks now plateauing it will be interesting to see if refinery utilization picks up again in this week’s release, although with the presence of the US holiday such a result may have to wait for another week.

Weekly Inventory Analysis: EIA release of 16th January

Summary of this weeks’ EIA crude inventories release:

API: +0.046 mb

EIA Consensus: +2.2 mb

EIA actual: -0.95 mb

This week’s EIA inventories release showed a shock fall in crude inventories, despite a fall in refinery inputs and operating utilization. Rather this fall in stocks appears to be a result of a large decrease crude imports. While US crude production continued to increase at a startling rate, there were also signs of demand picking up with an increased total petroleum products supplied number, including the much watched gasoline demand.

The Breakdown

Crude inventories fell by -0.95 mb in the US at the end of last week, against a consensus expectation of +2.2mb . Some of those surveyed would not have known about the API release that came in at a small increase of 0.046 mb, but given the fact the two surveys often differ from each other a negative number would not have been completely unexpected.

There were some signs in the breakdown that at first point seemed bearish. For instance gasoline stocks continued to increase for the 8^th week running, by 1.9 mb, to reach the highest point since February of 2011. However, as the chart below shows such a rise is normal for this time of year, with stocks peaking each January/February.

While there was a fall in crude inventories, there was also a fall in refinery input and utilisation levels  - hence it is natural to ask how this fall in stocks came about with a lower refinery demand. The answer appears to be in the import numbers, with crude imported into the US falling by 312,000 b/d last week.

While refinery demand for crude appeared to have fallen and product stocks remain elevated, the fact that refiners are at least switching from imports to domestically produced crude would appear bullish for WTI. While such a situation would mean the opposite for Brent, both grades could at least take some support from the higher levels of products supplied seen last week, with gasoline in particular seeing a rise of 310,000 b/d.

How Markets Reacted

The release was mixed this week, and while the headline number vs consensus was positive, the detailed release showed a variety of signs that could be interpreted as either positive or negative for each grade. What appears to be the key info for markets in this current economic environment are demand signs, and this week we have seen that products supplied have indeed increased and the demand for WTI in particular has gone up due to lower imports.

Just before the EIA release at 15:30 GMT, WTI was priced at around $93.58. As the one-minute graph below shows, in the few minutes after the release the price increased to around $93.85 before trading sideways for around 30 minutes and then jumping up almost another $0.50 to $94.30. In total the maximum gain in the hour after the release was just over 70 cents. The grade ended the day 80 cents higher than its open of $93.4 at $94.2.

Brent also followed a similar pattern. As the one-minute chart below shows, the grade was priced around $109.75 before the release, jumped to $110 within 2 minutes and then looked to be losing almost all of its momentum before rising up to reach a high of $110.35, a total increase of 60 cents. In total the grade finished just 10 cents up on the day at $109.7, falling in the remaining hours of trading.

This week’s release

This week’s EIA release will be the first that provides a full week of data on inventories after the restart of the Seaway pipeline since its reversal and capacity expansion, first mentioned in my previous post “TheWTI-Brent Spread”. This will therefore be an interesting release, and the key details to look out for will be how much of any refinery input change has come from this increased flow of US domestic oil versus imports. However, with the price of WTI already increasing to a large degree this week, it is likely the pipeline has had an effect on allowing some of the supply glut to be reduced. With this rough idea in mind, demand signs in the EIA release should continue to have a large impact on prices.

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. 

Weekly Inventory Analysis: EIA release of 4th January 2013

How did EIA inventories affect Crude prices this week?

This is the first weekly inventory analysis post, which will look at the effect of the industry-backed API and government-backed EIA oil inventory reports and how they've affected WTI and Brent oil prices. For background information on these releases, check my previous blog post EIA & API Crude Oil Inventories Report: An Introduction.

Both releases were two days late last week due to the New Year, with the API release coming late on Thursday night and the EIA release coming at 4:00pm GMT on Friday. This meant the releases coincided with what is considered one of the most important macroeconomic indicators of the month: US non-farm payrolls. This indicator, which details the change on employment and the unemployment rate in the world’s largest economy, is often considered a good forecast for future demand potential. For a more detailed description check this brief description at Investopedia. Because of the fact the non-farm payrolls and the EIA numbers were released on the same day, it is necessary to discuss the former first.

The non-farm payrolls number came in as positive, causing a rally in US stocks which are historically correlated with oil prices due to the fact that both have consumption as their main drivers. Hence on the non-farm payrolls release both WTI and Brent rallied for around an hour and a half, stabilizing shortly before the release of the EIA release.

The API release had reported a fall in inventories of -12 million barrels. This was significantly more than the consensus forecast of -1 million barrels from a Bloomberg survey. Hence market followers may have been surprised when the EIA release, which confirmed this large fall in inventories with   -11.1 million barrels, actually resulted in a bearish reaction from both grades.

Despite the high fall in inventories, articles such as this one from Reuters suggest the headline number may be severely biased to the downside due to accounting reasons. Essentially refiners reduce purchases in the last week of the year for tax purposes. This would likely have been coupled with cargoes being held off-shore, which could result in a larger than expected inventory increase this week or next as industry participants catch-up.

This technicality alone was not enough to cause the bearish sentiment, rather the EIA breakdown contained a number of indicators that implied demand had significantly weakened in the last week of the year; negative news for both grades. Firstly, consumption of gasoline had fallen significantly and secondly stocks of both gasoline and distillates had continued their upward trends and surpassed consensus expectations, with gasoline stocks now having risen for 6 consecutive weeks.

While WTI remained buoyed for the remainder of the day by US employment numbers, Brent faced more negative news in the form of import data. Net imports for the last week of the year fell to their lowest point since February 1996, as the first chart below shows. Even worse for imported Brent grades, the second chart shows US net imports as a % of total petroleum products supplied to the domestic market reached the lowest proportion since 1991, and even on a 4 week moving average both charts show clear accelerations of negative trends since the second half of the year, implying US infrastructure for shifting the recent boom of domestically produced WTI is indeed improving at an accelerating rate (For more detail see The WTI-Brent Spread: Narrowing in the New Year? ).

Overall the inventory results this week, in particular the fact that a large fall in inventories was coupled with a quick fall in both WTI and Brent prices, demonstrates the lesson that as always the key is in the detail. Hence, while some traders might hope to profit immediately on the news, it is always better to check the numbers in more detail or at least to wait for price trends to develop. This thought process is clear in the 1-minute graphs below (WTI is on top). Both show immediate rises on the 4:00pm mark which are soon reversed before more declines come about 10 minutes later as traders and analysts have time to form a real opinion and market sentiment forms. This sentiment continues for around 30 minutes in each case before other factors come back in to play.

Watch out for the EIA release tomorrow which could show a rebound in inventories as refiners restock after the end-of-year destock seen last week. Given the technicality regarding the headline figure, sentiment will most likely form on whether the negative trends in gasoline and distillate stocks and demand have continued, which could enhance fears regarding current political fighting over the US debt ceiling which have already seen some securities pull-back.

EIA & API Crude Oil Inventories Report: An Introduction

Followers of oil-related news may be familiar with the weekly-release of US oil inventory data. There are two different releases each week, one on a Tuesday evening (UK time 21:30) by the industry-backed American Petroleum Institute (API) and the other on Wednesday afternoon (UK time 15:30) by the government Energy Information Administration (EIA), with the latter often being viewed as the main market mover. In this post I’ll be discussing the importance of these data releases and how they affect the market.

Oil, like all commodities, is fundamentally driven by economic laws of supply and demand. Inventory data is therefore important as it provides an indication of the net position of supply minus demand and can be tracked over time. If inventories are falling over time then it is likely that either demand is increasing or supply is decreasing, and hence the price of oil is likely to increase. Tracking inventories over time also gives an indication of the extent of effects caused by one-off supply or demand disruptions. For instance if inventories have held at a steady level but then supply is disrupted by severe weather,  inventory data will give market participants an indication of the extent of the disruptions to the oil supply chain.

The EIA release can be found here. While the overall stock of crude oil is the headline number reported in inventory releases, the EIA release also provides a breakdown which covers everything from refinery usage through to imports, exports, consumption and supply for a number of different petroleum products. Because of this breakdown the EIA release does not only directly affect crude prices but also futures prices of other fuels such as gasoline.

Which report is better?

Both industry-surveys are conducted in a similar manner, but the EIA survey is government mandated while the API survey is voluntary. The EIA report will be the most useful for non-institutional investors looking for a full breakdown report as it is free to access. While the EIA report is often considered the main market mover, the API report still moves the market as it gives an early indication of what the EIA numbers are likely to be. However the surveys do often come up with different numbers, and an interesting article from the FT gives a short analysis of the differences. For interesting readers, energy commentator Geoffrey Styles posted an interesting article here about how the reports could be improved.

How does the market react to the releases?

Energy market news before the EIA release will often quote that oil is up or down based on a combination of the earlier API release and a consensus view of forecasters. A good example is this Bloomberg article from December 19^th that discusses how oil gained when the API figures showed an inventory fall of three times more than the forecasted amount (-4.1 million vs consensus of -1.75 million). Momentum from this early release will often then build throughout the morning in anticipation of the EIA report. Normally the EIA should still move the market, and in theory in a similar way to the API report; if the release shows inventories fell by more than consensus momentum may continue and the oil price will rise further. Interestingly on December 19^th the EIA report actually showed inventories dropped by 1 million barrels, a whole 3.1 million barrels less than the API report and 0.75 million less than the consensus view. Despite this, oil still saw strong positive pressure and increased by more than a dollar in 30 minutes of trading, as the chart below shows. This could be that traders simply saw the later release as confirmation that WTI inventories were at least beginning to fall, given the supply glut discussed in my previous article “The WTI-Brent Spread: narrowing in the New Year?”.

How to profit from the inventory report?

There are a number of ways in which investors can profit from the inventory reports. Clearly as the graph above shows, both the API and EIA numbers can generate strong market momentum if they deviate from the consensus view. One way to profit from the report is using short-term trades to capture the positive or negative momentum created from the deviation from consensus. If inventories actually increase more than expected it is likely oil wall fall for a short-time period after the release, and possibly for the rest of the day, and vice-versa. To test this theory, I will be providing a weekly update on release on the inventory figures to see how the markets reacted for the rest of the day after the trade – please check the “Oil inventory report analysis” section on the right for more.

Lastly the inventory number will also influence other securities such as equities and FX. A post explaining how and why this happens will be provided in the coming weeks.