The federal government’s Energy Information Administration (EIA) announced a larger-than-expected build in crude oil and gasoline stockpiles. The agency’s bearish report further added that distillate supplies increased unexpectedly despite cold weather conditions, fueling renewed concerns about weak demand in the U.S. The only saving grace came in the form of refinery run-rates, which increased from the previous week.
In its release, the agency said that crude inventories rose by 3.7 million barrels for the week ending Jan. 8, much more than anticipated. The increase in crude stocks, the second in as many weeks, can be attributed to rising imports. This follows a 4-week trend of a steady decline in supplies, which slid by approximately 14 million barrels during the period, fueled by cold weather.
At 331.0 million barrels, crude supplies remain 4.4 million barrels above the year-earlier level and above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The crude supply cover increased from 23.7 days in the previous week to 23.9 days and is well above the year-earlier level of 22.6 days.
Supplies of gasoline rose by 3.8 million barrels from the previous week, against expectations of a smaller build, as demand remained weak. At 223.5 million barrels (near a two-year high), current inventories exceed the year-earlier levels and are above the upper half of the historical range, as shown in the following chart from the EIA.
Distillate fuel inventories (including diesel and heating oil) grew by 1.4 million barrels last week (they were expected to fall) to 160.4 million barrels, reflecting a production increase that more than offset the rise in demand stemming from frigid weather conditions. It remains above the upper boundary of the average range for this time of year. This is shown in the following chart, also from the EIA.
Refinery utilization advanced 1.4% from the prior week to 81.3%, higher than analyst expectations, as they processed slightly more crude oil. Despite the modest rise, utilization rates remain much lower than last year’s levels.
The overall demand picture remains weak, as reflected by the dip in the total refined products supplied over the last four-week period, a proxy for overall petroleum demand. It fell by 0.9% from the year-earlier period, with gasoline up 0.4%, distillates (includes diesel) down 4.0% and jet fuel up 3.2%.
The larger-than-anticipated buildup in crude and fuel supplies (gasoline and distillates) has again raised concerns about the U.S. crude demand and the sluggish pace of a global economic recovery. As a result, following the EIA release, crude oil prices pulled back below $80 a barrel, the lowest level the commodity has traded at since the end of 2009.
Further exerting downward pressure on the commodity were worries relating to expectations of warmer weather in the coming months, along with Chinese banking regulation that could threaten the appetite of the world’s second largest global crude oil consumer.
The EIA numbers prove that the specter of a continued glut in global crude/fuel supplies still exists, and all of the inventories remain higher compared to averages for this time of year. As a result, we are not fully convinced about the sustainability of crude oil’s current gains, which have staged a remarkable rally in 2009, increasing more than 75% (following a 54% dip in 2008). In particular, refining activity remains weak with utilization rates staying at historic lows for this time of the year amid too much supply of petroleum products in the face of sharply lower demand.
As such, we have a bearish stance on oil refiners like Sunoco Inc. (SUN), Tesoro Corp. (TSO), Valero Energy Corp. (VLO) and Western Refining Inc. (WNR), given that the overall environment for refining margins is likely to remain poor. The sharply lower refinery utilization (at just 81.3% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.
Firms like Chevron Corp. (CVX) and Marathon Oil Corp. (MRO) — oil majors that have significant refining operations — are also expected to remain under pressure until pricing and demand improve. The companies recently released their fourth-quarter interim updates cautioning about weak downstream results, adversely affected by depressed refining margins.
We would also like to maintain our cautious outlook (Neutral recommendation) on oilfield service firms until the demand outlook improves. Companies such as Schlumberger Ltd. (SLB), Baker Hughes Inc. (BHI) and Weatherford International (WFT) fall in this category.
Read the full analyst report on “SUN”
Read the full analyst report on “TSO”
Read the full analyst report on “VLO”
Read the full analyst report on “WNR”
Read the full analyst report on “CVX”
Read the full analyst report on “MRO”
Read the full analyst report on “SLB”
Read the full analyst report on “BHI”
Read the full analyst report on “WFT”
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