Yesterday, we got a bullish report from the federal government’s Energy Information Administration (EIA), showing a surprise decline in crude stockpiles. However, the data also showed a buildup in gasoline and distillate inventories, thereby somewhat neutralizing the positive impact.
In its weekly release, the agency reported a much bigger-than-expected 5.9 million barrels drop in crude inventories for the week ending September 4, as imports fell and refiners raised demand. This follows last week’s release, which also reported crude drawdown but were below expectations.
Current crude oil stocks, at 337.5 million barrels, are 13.3% 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 from 23.6 days in the previous week to 22.9 days of supply, but it remains above the year-earlier level of 20.3 days.
Gasoline stocks showed an unexpected 2.1 million barrels week-over-week increase (far off estimates that hoped for a drawdown) as demand weakened. At 207.2 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 2.0 million barrels last week (more than anticipated) to 165.6 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.
Refinery utilization was unchanged at 87.2%, though it bettered forecasts for a drop. Still, utilization rates continue to hover below seasonal norms due to low profitability for products.
The overall demand picture remains weak, but for the second successive week, total refined products supplied over the last four-week period, a proxy for overall petroleum demand, turned positive. It was up 2.0% from the year-earlier period, with gasoline up 2.2%, distillates (includes diesel) down 5.6%, and jet fuel down 9.9%.
The higher-than-expected crude stockpile drop and the rise in U.S. petroleum demand have again raised hopes that the worst of the recession-induced slump may be over. As a result, oil prices have gone up by approximately $4 per barrel this week and are currently hovering around the $72 per barrel level. However, the increases in gasoline and distillate stockpiles will limit any sustained crude gains, in our view.
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 60% 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 Schlumberger Ltd. (SLB), 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 “SLB”
Read the full analyst report on “BHI”
Read the full analyst report on “WFT”
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