Yesterday, we got a bearish report from the Energy Information Administration (EIA), with crude oil stockpiles showing an unexpected rise. In its weekly release, the agency said that crude inventories rose 128,000 barrels from the preceding week, far off estimates that hoped for another drawdown, following last week’s encouraging data. Major contributing factors to the inventory buildup were a rise in domestic production and crude oil imports.

Current crude oil stocks, at 343.8 million barrels, are 12.4% above the year-earlier level and remain above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The supply cover increased marginally from 23.7 days in the previous week to 23.8 days of supply and remains significantly above the year-earlier level of 20.5 days.

Gasoline stocks were down 1.7 million week over week, better than expectations and in line with seasonal tendencies. However, at 208.1 million barrels, current inventories are above year-earlier levels and remain in the upper half of the historical range, as shown in the following chart from the EIA.

The overall demand picture still remains weak. Total refined products supplied over the last four-week period, a proxy for overall petroleum demand, was down 0.9% from the year-earlier period, with gasoline down 0.3%, distillates (includes diesel) down 7.9%, and jet fuel down 11.8%.

The crude stockpile buildup has again raised concerns about the U.S. crude demand and the sluggish pace of a global economic recovery. As a result, oil prices fell to $71 per barrel after briefly hitting a 10-month high of $75.

While we expect the commodity’s near-term price movement to continue mirroring the evolving macro-economic picture, we do not expect it to revisit its December ’08 lows. We believe that oil prices have troughed already and are currently in a consolidation phase.

Oil’s impressive gains this year — the commodity has gained roughly 70% year-to-date — have been driven almost entirely by an improving economic outlook and favorable currency moves. However, continued anemic demand and the strong build in excess production capacity over the last few months are expected to prevent any sustained price rallies.

Considering this uncertain scenario, we prefer to maintain our cautious outlook for integrated oil players such as Chevron Corp. (CVX), Marathon Oil Corp. (MRO) and Hess Corp. (HES), as well as oilfield service names such as Baker Hughes Inc. (BHI) and Weatherford International (WFT). We currently rate shares of these companies as Neutral.
Read the full analyst report on “CVX”
Read the full analyst report on “MRO”
Read the full analyst report on “HES”
Read the full analyst report on “BHI”
Read the full analyst report on “WFT”
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