Oil Inventories Higher Again

Highlights include Exxon Mobil Corp. (XOM - Analyst Report), Chevron Corp. (CVX - Analyst Report), Transocean Ltd. (RIG - Snapshot Report), Pride International, Inc. (PDE - Analyst Report) and Schlumberger Ltd. (SLB - Analyst Report).

Oil Inventories Close to Multi-Year Highs

In its weekly status report today, the Energy Information Administration (EIA) reported another build in inventories of crude oil and refined products. But the increase in inventories was less than expected, strengthening oil prices that had weakened in anticipation of a substantial build.

Despite the relatively favorable report, the fact remains that crude oil stockpiles remain significantly above seasonal and historical levels. In fact, at 361.1 million barrels, current crude oil inventories are just one million barrels shy of their highest point since 1990.

The agency reported that total commercial crude oil stocks increased by 1.7 million barrels from the preceding week, modestly below expectations. Current stocks are 14.3% above the year-earlier level and remain above the upper limit of the average for this time of the year, as evident from the nearby chart from the EIA. The supply cover remained unchanged from the previous week at 25.4 days of supply, significantly above the year-earlier level of 22.1 days.

For refined products, the agency reported greater-than-expected inventory builds. Gasoline stocks increased by 0.7 million barrels, while distillate stocks fell by 3.4 million barrels. Continuing with the recent trend, stocks at Cushing, Oklahoma -- the delivery point for NYMEX contracts -- dropped by 900,000 barrels. Stocks at this critical delivery point peaked in February and have dropped in seven of the last eight 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 Dec'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 Mobil Corp. (XOM - Analyst Report) and Chevron Corp. (CVX - Analyst Report), but are increasingly getting more comfortable with building positions in the deepwater drillers, such as Transocean (RIG - Snapshot Report) and Pride (PDE - Analyst Report), and Schlumberger (SLB - Analyst Report), the global oilfield service franchise.