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Oil Scales $104, Even as Supplies Jump

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The U.S. Energy Department's weekly inventory release showed that crude stockpiles recorded a big jump, as imports climbed and refiners scaled down their utilization rates. The report further revealed that within the ‘refined products’ category, gasoline stocks rose, while distillate supplies were down from the week-ago level.

Despite the unsupportive data from the U.S. government, crude gained handsomely on Wednesday – climbing 2% to settle at $104.10 a barrel – following reports that the southern portion of TransCanada Corp’s (TRP - Free Report) Keystone pipeline will be completed by the end of October. This is a major initiative that allows the crude glut at the Cushing oil-storage hub in Oklahoma to be unlocked.  

About the Weekly Petroleum Status Report

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

Analysis of the Data

Crude Oil: The federal government’s EIA report revealed that crude inventories climbed 5.47 million barrels for the week ending Sep 27, 2013, following an increase of 2.64 million barrels in the previous week.

The analysts surveyed by Platts – the energy information arm of McGraw-Hill Financial Inc. – had expected crude stocks to go up some 2.4 million barrels. A sharp uptick in the level of imports and drop in refinery utilization rates led to the massive stockpile build-up with the world's biggest oil consumer.

However, crude inventories at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – were down 59,000 barrels from the previous week’s level to 32.79 million barrels. Stocks are currently at their lowest since Feb last year and 36.8% under the all-time high of 51.86 million barrels reached in Jan.

Despite the second inventory increase in 2 weeks, at 363.73 million barrels, current crude supplies are still down slightly (by 0.3%) from the year-ago period, though it is close to the upper limit of the average for this time of the year. The crude supply cover was up from 22.6 days in the previous week to 23.1 days. In the year-ago period, the supply cover was 24.8 days.

Gasoline: Supplies of gasoline were up for the third time in 4 weeks, as domestic consumption weakened and imports climbed. This was partially offset by lower production.

The 3.50 million barrels gain – contrary to analysts’ projections for a 1.4 million-barrels decrease in supply level – took gasoline stockpiles up to 219.73 million barrels. Following this build, the existing inventory level of the most widely used petroleum product is 12.1% higher than the year-earlier level and is at the top of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) were down 1.68 million barrels last week, slightly lower than analysts’ expectations for a 1.8 million barrels fall in inventory level. The decrease in distillate fuel stocks – the third in as many weeks – could be attributed to strong demand and lower imports, somewhat negated by higher production.

At 129.18 million barrels, distillate supplies are 4.1% above the year-ago level but is close to the lower limit of the average range for this time of the year.

Refinery Rates: Refinery utilization was down 1.3% from the prior week to 89.0%. The analysts were expecting the refinery run rate to decrease 1.1% to 89.2%.

Stocks to Consider

With spot crude price staying strong – at around $104 a barrel – brokerage analysts are likely to upgrade their forecasts on oil-weighted companies and related support plays, leading to positive estimate revisions.

While all crude-focused stocks – including behemoths like Exxon Mobil Corp. (XOM - Free Report) – stand to benefit from rising commodity prices, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.

In particular, one can look at Stone Energy Corp. (SGY - Free Report) – a small-cap, undervalued E&P player – as a good buying opportunity. Lafayette, Louisiana-based Stone Energy, sporting a Zacks Rank #1 (Strong Buy), with current focus on the Gulf of Mexico and the Appalachia regions, is expected to witness consistent earnings growth from its multi-year inventory of drilling prospects.

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