Wednesday – Inventories Set To Disappoint, But Any Rally Will Be Brief
Posted by zmann on February 14, 2007
Oil Rallied As The International Energy Agency Boosted It’s Oil Demand Forecast, Then Nudged Higher By VLO Refinery Fire. March crude rallied $1.25 to $59.06 yesterday as the one two punch of forecast higher global oil demand and yet another oil industry fire boosted prices. Spot gasoline shot up $0.08 to $1.62, more than reversing the prior day’s slide and continuing the rally that began with crude’s advance in mid January. The refiners, including VLO which had the fire, soared. Some takeaways from yesterday’s action:
- The Impact of IEA’s Demand Forecast Will Be Fleeting…The International Energy Agency revised its estimate of growth upwards by 273,000 bopd in 2008 to 1.55 mm bopd for total demand of 86 million bopd. The increase was primarily the result of a revision to Chinese demand.
- …But Saudi Arabia’s “Healthy Oil Market” Will Have A More Lasting (and bearish) Impact. Saudi signalled they are done curtailing production (they even mentioned increased shipments to Asian refiners in March) which sort of defangs the OPEC hydra.
- VLO reported a small fire at a refinery in Delaware (the second in a week)… The company said it contained and extinguished the small fire but no timetable for resumption of operations has been announced. Also remember that VLO expects to restart its larger Texas City refinery next week which was damaged by fire January 28th.
- …But the overreaction looks like last week’s Elk Hill’s advance. The majority of today’s reaction was mostly due to the latest refinery snafu; prices spiked on the news and never looked back. It reminds me of last week’s Elk Hills rally which sent crude up $2 for a day until everyone realized it wasn’t that big a deal.
Holdings Watch: Energy stocks rose more on a $1.25 increase in crude than they fell on it’s $2 decline the day before. Do that long enough and you get this. A state of denial remains in effect until further notice. Oh, we’ve got a few of the more daring research shops looking into the impact of lower commodity prices and ever escalating service costs on E&P cash flows but their clarion call is not yet widely heard. At the bulge bracket firms, energy remains near the top of the recommend list where a recovery in commodity prices, not production growth or cost curtailment, is key to their continued predisposition towards Buy ratings.Here are the estimates from Bloomberg’s weekly survey:
- Crude – UP 0.6 to 1.6 million barrels (to ~10% above the 5 year average). While the weekly number here remains less important that heating oil (and increasingly this time of year, gasoline) unless it significantly misses the mark in either direction the magnitude of supplies must begin to put pressure on crude, especially as we enter the shoulder season.
- Gasoline – UP 2 million barrels. Gasoline inventories are already well above the five year range and the rebound in wholesale prices should quickly abate if we, as expected, get the ninth consecutive build in inventories.
- Distillates – DOWN 4 to 5 million barrels. I think this number could be a lot bigger than this, but even with a 8 mm barrel draw (not inconceivable) distillate storage would remain slightly above the 5 year aveage.
- Oil weighted HDDs soared to 332 last week versus 282 in the week before when the withdrawal of 3.7 mm barrels also exceeded estimates. Unless there is a marked increase in refinery utilization and it’s directed towards distillate production I don’t see a number as small as the predicted 4 mm barrel pull.
- Moreover, those secondary and tertiary stockpiles have to be refilled after this many consecutive weeks of cold weather.
We Could See A MUCH BIGGER WITHDRAWAL From Heating Oil Inventories (so wait to see what happens before taking on new positions). 2003 was very similar to this year in that the winter like weather got off to a late start. In the second half of January oil weighted degree days crossed the 300 mark and draws on distillates quickly grew from nothing to 3 mm barrels , then 6 and finally 10 million barrels. None of those degree day readings surpassed this past week’s 332. So again I’m being careful and waiting for the post inventory exhaustion to set in. If the number is over 5 million barrels it may provide the impetus for a jump to $65 but I think it will be short-lived. Next week’s early read on degree days shows a marked warming trend.
Odds & Ends:
From The EIA’s Natural Gas Page: Beginning with the March 2007 issue, (data reported for January 2007) of the Natural Gas Monthly, EIA will present more timely natural gas production data (collected on the Form EIA-914, “Monthly Natural Gas Production Report”), that will result in changes to data elements and table formats. The impact of these changes is discussed at: http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/natural_gas_monthly/historical/2007/2007_01/pdf/impact914ngm.pdf
Comment: Better late than never no longer applies. Halleluja. Data reported in March will be for January. That’s one month better than current reporting. One caveat: timeliness = less accurate/specific data. They’re cutting out some state level detail and the oil well gas (casinghead) vs gas well gas split. You’ll have to wait for the EIA’s Gas Annual for that.
Analyst Watch: Very quiet. DO PT upped from $90 to $118 at FBR.