Analysis of U.S. EIA Data: 11-week crude stock decline abruptly ends

New York - July 29, 2009

U.S. crude stocks climbed 5.152 million barrels to 347.84 million barrels the week ending July 24 as inputs edged down and imports soared, an analysis of the weekly data from the U.S. Energy Information Administration (EIA) showed Wednesday.

At 347.84 million barrels, U.S. crude stocks were 29.805 million barrels above the five-year average and 52.591 million barrels above year-ago levels.

U.S. crude imports surged 821,000 barrels per day (b/d) to 10.024 million b/d, a six-month high. With the contango at the front of the New York Mercantile Exchange (NYMEX) crude oil futures curve* widening, traders had the economic incentive to bring floating storage ashore and move the barrels to the NYMEX futures contract delivery point in Cushing, Oklahoma. Contango is the industry vernacular for the condition whereby prices for nearby delivery are lower than prices for future-month delivery.

Cushing stocks climbed 1.31 million barrels to 32.121 million barrels, just 2.795 million barrels less than the all-time high the week ending February 6. Cushing stocks were 8.721 million barrels above the five-year average and 12.6 million barrels above year-ago levels.

After being range bound since the beginning of May, the NYMEX front-months spread suddenly traded out to minus $1.71 per barrel ( /b) following EIA's data release last week. The September/October spread further weakened after the release of the week's data, trading out to minus $1.95/b after settling Tuesday at minus $1.75/b.

Weakness in the front of the NYMEX crude curve drove the U.S. benchmark to a steeper discount to September Brent on the IntercontinentalExchange (ICE). The September West Texas Intermediate (WTI)/ Brent spread widened out to about minus $3.30/b after settling the previous session at minus $2.65/b Tuesday.

CRUDE STOCKS BUILD IN MOST REGIONS

The crude oil stock build was across-the-board, with increases in every region except the Rockies. East of the Rockies, crude inventories rose 2.9 million barrels, while stocks on the West Coast rebounded from last week's 3.9 million barrel draw, jumping 2.4 million barrels, with a steep increase in imports into that region behind the build.

Crude imports into the West Coast rose 406,000 b/d to 1.352 million b/d and increased 388,000 b/d to 5.634 million b/d on the Gulf Coast, the two regions accounting for almost the entire jump in U.S. imports.

While imports soared, refinery inputs fell yet again, edging down 171,000 b/d to 14.608 million b/d. On a four-week moving average, crude inputs at 14.865 million barrels were 442,000 b/d less than year-ago levels.

Lower inputs caused production of both gasoline and distillate to drop. Gasoline stocks fell 2.315 million barrels to 213.076 million barrels while middle distillates stocks rose 2.108 million barrels to 162.617 million barrels, the highest level since October 1983.

Distillate inventories were 35.423 million barrels greater than the five-year average and 32.112 million barrels more than year-ago levels, with another two months of inventory-building to go before winter fuel demand seasonally kicks in.

Implied demand for distillate dipped 190,000 b/d to 3.265 million b/d week-over-week, but on a four-week moving average distillate demand was still down 10.7% year-over-year. Implied demand is the amount of product that moves through the US distribution system, not actual end consumption. Gasoline demand also edged down week-over-week, falling 84,000 b/d to 9.171 million b/d. On a four-week moving average, gasoline demand at 9.205 million b/d was 0.8% above year-ago levels.

While gasoline stocks typically decline throughout the summer as a result of high levels of consumer demand throughout peak driving season, this year's drop has resulted from low levels of output. Gasoline stocks were 4.18 million barrels above the five-year average, but 484,000 barrels below year-ago levels. Given 2.726 million b/d of spare refining capacity, a deficit as slim as the one in gasoline against year-ago levels can be eradicated easily.

* Each consecutive month of a futures contract for a specified commodity typically carries a higher price to reflect the cost of storing the commodity for another 30 days and the lost opportunity cost due to financing that storage. A futures curve refers to the actual graphic plotting of those price differences. In contango, the curve is usually upward trending and widening. In backwardation, the curve is down-trending and narrowing or flattening.