Crude Oil Market Analysis

Great to have you back Dr. Chen!

 

Crude Oil Market Analysis (4/11/07)

Today’s market is “much ado about nothing.”

Today’s market followed yesterday’s forecast that “tomorrow’s DOE report should be supportive, and the market risk remains on the upside.”

Refinery input of crude oil was 15.1 million barrels per day, in line with COMA forecast of 15.0 million barrels per day, and was the first time it reached above 15.0 million barrels per day since Jan. 12, 2007. Crude oil import fell to 9.8 million barrels per day, in line with COMA forecast of a drop “below 10.0 million barrels per day.” The crude build of 0.7 million barrels falls within the COMA forecast range of a build of 0.5-1.8 million barrels.

Despite the increase in refinery turnaround to 88.4%, gasoline production fell to 8.5 million barrels per day, the lowest output since Oct. 7, 2005 after Hurricane Katrina. Import also fell to 953,000 barrels per day, resulting in a draw of 5.5 million barrels, the largest draw since Aug. 22, 2003, to 199.7 million barrels, the first time the inventory falls below 200.0 million barrels since Nov. 25, 2005.

The increased refinery turnaround did cause an increase in distillate production to 4.2 million barrels per day, slightly above COMA forecast of 4.1 million barrels per day. The drop in import to 259,000 barrels per day was larger than COMA’s forecast drop to “just above 300,000 barrels per day.” The record cold temperature in the Northeast did cause an increase in demand but only to 4.3 million barrels per day, less than COMA forecast of 4.4 million barrels per day. The result was an inventory build of 100,000 barrels instead of COMA forecast of a draw of 2.8 million barrels.

Today’s DOE report was EXTREMELY bullish, as the crude build was smaller than the Street forecasts, and gasoline draw was much larger than the Street forecasts. Gasoline did what was expected—jumping to $2.1700 after the report, but the jump in gasoline price did not impress the crude market, as the market could not stay above yesterday’s high of $62.28 after reaching a high of $62.56 and settled $0.12 higher at $62.01.

The market may have focused on the recovery in refinery turnaround and expect more products to be available when more refineries come back online. Two considerations may also have contributed to the market’s discount of the gasoline draw of 5.5 million barrels. One is that the draw of 5.5 million barrels may have been a technical necessity by refineries as they empty tanks of winter-grade gasoline for summer-grade gasoline, much as they did before May 2006 when they were switching product from MTBE to RBOB. A second consideration is that the consistent below-normal import level may soon end as the strike at French port has ended recently.

The failure of the crude market to stay above $62.28 despite the bullish report signals that the market wants to test the low at $61.35 again before rallying back to the mid-$60s.

Fundamentally, the supply of crude oil remains tight as refineries ramp up to produce more gasoline to meet record demand for the summer. As COMA briefly mentioned yesterday, the market is temporarily distorted by the bulging inventory in Cushing, Oklahoma of 27 million barrels, the highest level since record-keeping began in April 2004. The bulging inventory has caused the Brent crude premium to West Texas Intermediate to widen further today to $5.83 from yesterday’s $5.53. Once the inventory in Cushing begins to be drawn down, the market will move higher toward Brent price.

Technically, the market has difficulty to stay above $62.28 despite today’s bullish DOE report, so the market will break the low of April 9 and April 10 at $61.35 towards $60.13 support.

Tomorrow, the IEA’s monthly report will revise down the oil consumption growth for 2007 due to a slower growth in the world economy. If no bullish news springs the market to above $62.30, it will drop below $61.35 toward $60.13 support once all the stops are triggered at or below $61.00.

Strategy: Buy at $60.40 with a stop at $58.95.

Dr. Chen

For the archive of Crude Oil Market Analyses, please visit http://energyfutures.blogspot.com/

 

$62.80 by now mainly due to comments from the IEA. Can we hold above $62.50?

 

Crude Oil Market Analysis (4/12/07)

Mea Culpa!

COMA was bullish and interpreted yesterday’s DOE report as “EXTREMELY bullish” and was seeking to enter the market on the long side by buying at a dip—at $60.40. As a result COMA focused on the forecast that today’s IEA report would revise down 2007 global oil demand--which was correct as the IEA revised down 2007 global demand by 250,000 barrels per day—but chose not to forecast that today’s IEA report would also warn a continued tightening of global oil supply due to OPEC production cut—from 26.77 million barrels per day in Feb. to 26.55 million barrels per day in March among the OPEC-10.

The market did not dip to provide a buying opportunity but instead took off on the bullish IEA report to break resistance at $62.30 and stayed comfortably above $62.50 until the news that ConocoPhillips shut several of its oil processing units in Wilmington, California gave the market another push in the last hour of trading to finish $1.84 higher at $63.85.

Fundamentally, the tightening of global oil supply leading up to the upcoming summer driving season and the uninterrupted refinery glitches will provide a solid support to the market.

Technically, now that the market trades above the resistance at $64.00, the gasoline’s breakaway from $2.1500 will lead the crude market to break away from $64.00 resistance until the gasoline market tests the next resistance at $2.2800.

Strategy: Buy at market at $64.12 with a stop at $63.15.

Dr. Chen

For the archive of Crude Oil Market Analyses, please visit http://energyfutures.blogspot.com/