The U.S. Energy Department’s weekly inventory release showed a surprise build in crude and gasoline stockpiles. The agency’s bearish report further added that distillate supplies logged a narrower-than-expected decline, while refinery run-rates also decreased from the previous week.
The federal government’s Energy Information Administration (EIA) reported an unexpected 1.3 million barrel rise in crude inventories for the week ending January 1, 2010 (against expectations of a drawdown), as refiner demand dropped. The rise in oil stocks snaps a 4-week trend of steady decline in supplies, which slid by approximately 14 million barrels during the period, fueled by cold weather.
At 327.3 million barrels, crude supplies remain 1.9 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 supply cover increased from 23.5 days in the previous week to 23.7 days and is well above the year-earlier level of 22.5 days.
Supplies of gasoline rose by 3.7 million barrels from the previous week, much higher than expected, as demand remained weak. At 219.7 million barrels, current inventories are above 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) fell by a smaller-than-projected 300,000 barrels last week to 159.0 million barrels. Increase in production somewhat dampened the rise in demand stemming from frigid weather conditions. However, 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 slipped 0.4% from the prior week to 79.9%, dashing expectations of an increase. Utilization rates continue to stay at historic lows for this time of the year amid too much supply of petroleum products in the face of sharply lower demand.
The overall demand picture has improved slightly, as reflected by the increase in the total refined products supplied over the last four-week period, a proxy for overall petroleum demand. It was up by 0.3% from the year-earlier period, with gasoline up 0.3%, distillates (includes diesel) down 1.0% and jet fuel up 8.2%.
The larger-than-anticipated buildup in oil and gasoline supplies 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, oil prices pulled back below $83 a barrel after settling near 15-month high a day earlier.
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. 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, the drop in petroleum stocks over the last few weeks have been triggered by weak refinery activity and falling imports rather than a much awaited fundamental improvement in oil demand that has remained largely unchanged.
As such, we prefer to maintain our cautious stance on oil refiners like Sunoco Inc. (SUN), Valero Energy Corp. (VLO) 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 79.9% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.
Tesoro Corp. (TSO), with its lack of geographic diversification and heavy exposure to the weak California market, remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Tesoro and have an Underperform recommendation on the company.
Companies 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 announced reduction in their 2010 capital budget with a larger percentage of funds allocated towards the Exploration & Production (E&P) segment as against the under-pressure refining business.
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 “VLO”
Read the full analyst report on “WNR”
Read the full analyst report on “TSO”
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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