Yesterday, the federal government’s Energy Information Administration (EIA) reported mixed inventory data. The crude drawdown was below expectations and distillate stocks were up more than anticipated. On the positive side, gasoline supplies dropped steeply and total U.S. oil demand over the last four-week period turned positive after a long time.

In its weekly release, the agency reported a lower-than-expected 372,000 barrels drop in crude oil stockpiles for the week ending August 28, as a jump in imports offset a rise in petroleum demand. This follows last week’s report, which showed an unexpected rise in oil supply figures, missing estimates of a drop.

Current crude oil stocks, at 343.4 million barrels, are 13.0% 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 decreased marginally from 23.8 days in the previous week to 23.6 days of supply, but it remains significantly above the year-earlier level of 20.3 days.    

Gasoline stocks showed a steep 3.0 million week-over-week decline, better than expectations and in line with seasonal tendencies. However, at 205.1 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.

Distillate fuel inventories grew by 1.2 million barrels last week (more than anticipated) to 163.6 million barrels and are above the upper boundary of the average range for this time of year. This is shown in the following chart from the EIA.

Meanwhile, refinery utilization was up 3.1% to 87.2%, much larger than analyst expectations, reflecting incremental increase in throughput. Still, utilization rates continue to hover below seasonal norms due to low profitability for products.

The overall demand picture remains weak, but for the first time in months total refined products supplied over the last four-week period, a proxy for overall petroleum demand, turned positive. It was up 0.1% from the year-earlier period, with gasoline up 0.5%, distillates (includes diesel) down 7.3%, and jet fuel down 12.1%.

The lower-than-expected crude stockpile drop has again raised concerns about the U.S. crude demand and the sluggish pace of a global economic recovery. As a result, oil prices have been currently hovering around the $68 per barrel level after briefly hitting a 10-month high of $75 last week.
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 50% 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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