Inventory Weighing on Oil Prices

Highlights include Exxon Mobil Corp. (XOM - Analyst Report), Chevron Corp. (CVX - Analyst Report), Transocean Ltd. (RIG - Snapshot Report), Diamond Offshore Drilling, Inc. (DO - Analyst Report) and Pride, Inc. (PDE - Analyst Report).

Inventory Build Weighs on Oil Prices

In its weekly status report today, the Energy Information Administration (EIA) reported another build in inventories of crude oil and refined products, which is expected to weigh on oil prices in the coming days.

The agency reported that total commercial crude oil stocks increased by 2.8 million barrels from the preceding week, significantly above expectations. This is the fourth consecutive week of inventory build, seriously denting growing optimism about the commodity’s supply-demand picture.

Current stocks are 12.6% above the comparable period last year. The supply cover continues inching up, with current stock levels sufficient for 25.4 days of supply -- significantly above the year-earlier level of 22.2 days.



For refined products, the agency reported inventory builds, while the expectations were for drawdowns. Gasoline stocks increased by 2.2 million barrels, while distillate stocks increased by 200,000 barrels.

On a positive note, stocks at Cushing, Oklahoma, the delivery point for NYMEX contracts, dropped by 800,000 barrels. Stocks at this critical delivery point peaked in February and have dropped in six of the last seven weeks.

Crude oil prices have pulled back from their mid-$50’s high for the year in the face of continued concerns about the health of the global economy. 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 late ’08 lows. We believe that oil prices have troughed already and are currently in a consolidation phase.

The continued anemic demand and the strong build in excess production capacity over the last few months are expected to prevent any sustained price rallies. We continue to advocate some defensive positioning in the group through Exxon (XOM - Analyst Report) and Chevron (CVX - Analyst Report), but are increasingly getting more comfortable with building positions in the deepwater drillers, such as Transocean (RIG - Snapshot Report), Diamond Offshore (DO - Analyst Report) and Pride (PDE - Analyst Report).