EIA: Fuel Supplies Fall Further - Analyst Blog

Recently, the federal government’s Energy Information Administration (EIA) issued an overall bullish report, showing a smaller-than-expected build in crude stockpiles. Further, the data showed that gasoline inventories were down as predicted, while distillate stocks also declined, though fell short of expectations.

In its release, the agency said that crude inventories rose by 1.3 million barrels for the week ending October 16, much lower than analysts’ expectations. This is the second successive week in which the crude buildup has been lower than originally anticipated. A major contributing factor to the modest increase can be attributed to a fall in crude oil imports, which dropped to the lowest level in two months.

Current crude oil stocks, at 339.1 million barrels, are 8.9% 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 from 23.3 days in the previous week to 23.6 days of supply and is above the year-earlier level of 22.6 days.

Supplies of gasoline declined by 2.3 million barrels from the previous week (in-line with analyst estimates), as the refinery processing rate remained low. At 206.9 million barrels, current inventories are above year-earlier levels and are near the upper half of the historical range, as shown in the following chart from the EIA.

Distillate fuel inventories (including diesel and heating oil) dropped by 800,000 barrels last week (less than anticipated) to 169.9 million barrels, but remain 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 was up a marginal 0.2% from the prior week to 81.1%, lower than analyst expectations, as refiners continued with their repairs and upgrades.

Total refined products supplied over the last four-week period — a proxy for overall petroleum demand — was down. It fell by 0.1% from the year-earlier period, with gasoline up 4.2%, distillates (includes diesel) down 12.1% and jet fuel down 3.2%.

The continued decline in fuel inventories (gasoline and distillates) has raised hopes that the worst of the recession-induced slump may be over and demand is picking up. Coupled with stronger equity markets and a soft dollar, this has sent oil prices to a new one-year peak, breaching the $80 per barrel level, thereby providing a big boost to energy stocks.

Though we welcome the bullish EIA data, we are not fully convinced about the sustainability of crude oil’s current gains, as the specter of a continued glut in global fuel supplies still weighs and all of the inventories remain higher compared to averages for this time of year. Moreover, the drop in petroleum stocks was triggered by weak refinery activity rather than a much awaited pick-up in oil demand.

As such, we prefer to maintain our cautious stance on oil refiners like Sunoco Inc. (SUN), Tesoro Corp. (TSO) and Western Refining Inc. (WNR), given that the overall environment for refining margins is likely to remain poor going into 2010.

The sharply lower refinery utilization (at just 81.1% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side. Being the largest independent refiner, Valero Energy Corp. (VLO) remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Valero and have an Underperform recommendation on the company.

Companies like ConocoPhillips (COP) and ExxonMobil Corp. (XOM) — oil majors that have significant refining operations — are also expected to remain under pressure until pricing and demand improve.

EIA: Fuel Supplies Fall Further – Analyst Blog

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