Published On: Wed, May 4th, 2016

New Data Generates Robust Petroleum Rally

On Wednesday April 6, the Energy Information Administration released its estimate of petroleum inventories and to the surprise of most in the market, they reported a large draw of crude oil. The draw cannot be completely unexpected as we are getting close to the time of year when crude stocks begin to decline as refineries end planned maintenance and begin to produce gasoline ahead of the summer driving season.

Since that report the petroleum market has experienced a robust rally, along with volatility. The issue for traders is that the only data points it can rely on is the current level of stocks (which is at historical highs), the large decline in inventories which now creates a new trajectory, as well as Friday report from Baker Hughes. According to the oil service giant, the US oil rig count fell by 8 to 354 this week. This is the lowest tally since November 6, 2009, and a third straight weekly decline.

September 2010 photo/Daniel Christensen

September 2010 photo/Daniel Christensen

It not hard to fathom that traders would see the decline in U.S. domestic production as well as the reduction in imports as a new trajectory that could continue. This is what has generated the large swings in prices.

Traders also need to contend with maintenance during the Q2. Planned refinery maintenance during the first half of 2016 is not expected to adversely affect the supply of gasoline, jet fuel, and distillate fuel. The effect of refinery outages on product supplies depends on many factors, including petroleum product demand, the availability of product supplies from available refinery capacity, inventories, imports and redirected exports, as well as actual levels of both planned and unplanned refinery outages.

Barring unusually high unplanned outages, planned outages that extend beyond the planned period, or higher-than-expected demand, the supply of gasoline, jet fuel, and distillate fuel should be adequate in all regions during the first half of 2016. Unfortunately, there is no way to forecast unplanned maintenance which could further boost prices during the heart of the summer season. Gasoline appears to be on the move, and could test resistance near the 1.46 level.

The entire petroleum complex received a boost as inventories unexpectedly declined according to the Department of Energy. Crude oil inventories decreased by 4.9 million barrels from the previous week, compared to estimates of a 3.2-million-barrel build. At 529.9 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Gasoline inventories increased by 1.4 million barrels last week, and are well above the upper limit of the average range, while distillate fuel inventories increased by 1.8 million barrels.

Demand in the United States remains robust and it is likely driven by the decline in gasoline prices which is increasing the likelihood of additional driving vacations. Total products demand over the last four-week period averaged 19.5 million barrels per day, up by 1.5% from the same period last year. Over the last four weeks, gasoline demand averaged about 9.4 million barrels per day, up by 4.2% from the same period last year. Distillate fuel demand averaged about 3.7 million barrels per day over the last four weeks, down by 6.8% from the same period last year.

Author: Jeremy Biberdorf

 1973 . David Falconer, Photographer

1973 . David Falconer, Photographer

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