Oil’s Inventory Overhang Easing

In line with the trend in recent weeks, we got another largely positive report from the Energy Information Administration (EIA), with crude oil stockpiles maintaining their recent downtrend. Crude oil’s weakness today appears to be due to the greater-than-expected growth in gasoline stockpiles, largely due to increased imports.

Given growing concerns about the impact that the recent increase in gasoline prices may have on the emerging economic recovery, the stalling or reversal of gasoline’s price momentum can only be termed positive, in our view. We have all along been for a pause in crude oil’s impressive rally to consolidate recent gains and ensure its long-term sustainability.

We continue to favor early-cycle leverage through the oilfield service names, such as Weatherford (WFT - Analyst Report) and Baker Hughes (BHI - Analyst Report). We continue to like deepwater drillers such as Diamond Offshore (DO - Analyst Report) and Transocean (RIG - Snapshot Report).

In its weekly status report today, the Energy Information Administration (EIA) reported a greater-than-expected drawdown in crude oil inventories. The agency reported a drawdown of 3.9 million barrels from the preceding week. A major contributing factor to the heavy inventory drawdown was a greater-than-expected drop in domestic production, most likely a result of maintenance-related activities, offsetting the expected growth in imports and refining utilization.

Current crude oil stocks are 18.8% above the year-earlier level and remain above the upper limit of the average for this time of the year. The supply cover dropped from 24.8 days in the previous week to 24.3 days of supply, though it still remains significantly above the year-earlier level of 19.6 days. The nearby chart from the EIA clearly shows early signs of the inventory overhang easing.



The buildup in gasoline stocks was greater than expected at 3.4 million barrels. However, current gasoline inventories stocks at 203.5 million barrels are below year-earlier levels and remain below the lower end of the historical range, as shown in the following chart from the EIA.



Overall demand for petroleum products remains soft, though gasoline demand has picked up due to seasonal factors and easy comparisons. Total refined products supplied over the last four-week period, a proxy for overall petroleum demand, was down 6% from the year-earlier period, with gasoline up 1.1%, distillates (includes diesel) down 8.9%, and jet fuel down 16%.