The U.S. Energy Department’s weekly inventory release showed a larger-than-expected climb in crude stockpiles, while distillate supplies posted a surprise build. Gasoline stocks, meanwhile, logged a sharp decline and refinery run-rates increased significantly from the previous week.
Crude Oil
The federal government’s Energy Information Administration (EIA) reported that crude inventories expanded by 2 million barrels for the week ending Apr. 2, 2010, bigger than analyst expectations. The increase in crude stocks — the 10th in as many weeks — can be attributed to rising imports, partly offset by a large gain in refinery utilization.
At 356.2 million barrels, crude supplies are 4.9 million barrels below the year-earlier level but remain above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The crude supply cover decreased slightly from 25.2 days in the previous week to 25.1 days. In the year-ago period, the supply cover was 25.4 days.
Gasoline
Supplies of gasoline fell by a larger-than-expected 2.5 million barrels from the previous week, mainly on the back of blending components drawdown. At 222.4 million barrels, 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
Distillate fuel inventories (including diesel and heating oil) reversed a series of weekly declines and were up by 1.1 million barrels last week, defying analyst expectations for another drop. The increase in distillate fuel supplies reflects lackluster demand. At 145.7 million barrels, distillate supplies 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 Rates
Refinery utilization improved 1.9% from the prior week, much ahead of analyst expectations. The sharp ramp up took the refinery run rate to 84.5%, the highest level in six months.
Our Take
The bigger-than-forecast increase in crude reserves, which are now at their highest level since mid-June 2009, again indicates that energy consumption in the world’s biggest economy remains slack. Further, the large build in crude stockpiles came even as refineries boosted operating rates to 84.5% of capacity, the highest since the week ended Oct. 2, 2009. We take this as a sign that there is no problem with the commodity supply.
The only saving grace came in the form of a larger-than-expected drawdown in gasoline supplies. But then again we note that the drop was concentrated on blending components, not the finished product. All these factors make the latest EIA report a fundamentally bearish one.
Together with a strong dollar, this pulled down oil prices below the $86 per barrel level.
Avoid the Refining Sector
The big gain in refinery use (almost 2%) is putting further pressure on the crack spread (or refiners’ profit margin), which are already squeezed. Domestic refiners are reeling under the specter of a continued glut in global fuel supplies with stocks of crude oil and petroleum products remaining at unusually high levels for this time of the year. In recent times, rising crude oil prices have added to their miseries by increasing the cost of production.
Refining margins were significantly lower last year, especially in the fourth quarter, as a result of narrower spreads on crude oil and oil products. We believe that this imbalance between supply and demand will remain in place over the coming 6 – 12 months and negatively impact the bottom line. 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).
Firms like Chevron Corp. (CVX), Marathon Oil Corp. (MRO) and ConocoPhillips (COP) — oil majors that have significant refining operations — are also expected to remain under pressure until pricing and demand improve. The companies have scaled back their worldwide downstream operations, as they think that oil refining margins are unlikely to improve substantially this year. Profitability has collapsed in recent times due to the global economic rout and a glut of new capacity in the emerging economies of Asia and the Middle East.
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 “COP”
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