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Inventory Drop Fuels Price Spike

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U.S. crude inventories fell by -400,000 barrels for the week ended August 8th according to the Energy Information Administration. This was double what analysts expected but not really the cause for the spike in prices.

Distillates inventories fell -1.8 million barrels when analysts were expecting a build of 1.7 million barrels and gasoline inventories fell by -6.4 million barrels. That was far in excess of the 2.1 million barrel expected decline. Refinery utilization fell to 85.9%.  

Analysts claim tropical storm Edouard slowed imports and that is what I have been saying for two weeks. Evidently the backup in tanker traffic was longer than I had expected.

The really bullish drop was the -6.4 mb of gasoline. We hear every day how demand has slowed and it is evident that refiners don't want to over supply the market. Oil they have in inventory today cost them more than today's $116 price. They can't refine it into gasoline and make a profit with gasoline prices falling sharply. They need to refine as much as possible into distillates like diesel, jet fuel and heating oil. They don't have a lot of leeway in their product mix simply because what they produce has to be in the oil to start with but there are some tricks they can use to increase yields in certain products. Diesel crack spreads have been much higher than gasoline for some time because the low sulfur diesel is harder to produce and commands a premium price. We also have strong demand for diesel and distillates outside the U.S. and some of the refined products have been leaving the country rather than going into inventory.

Regardless of the reasons for the various declines the falling levels of inventory suggest refiners will have to start buying oil soon and replenishing those inventories. With refiner utilization at a 4-month low that can't last either. In about three weeks refiners will begin changing over to winter fuels and that will allow crude inventories to build while the refineries perform maintenance. Some may already be taking advantage of this lull in demand to do maintenance early. If the refiners had been running at normal capacity around 90% for this time of year the drop in crude inventories would have been much worse.

Crude prices rose to $117 on Wednesday on the drop in inventories and a slight cooling of the dollar's recent rise. American's drove 4.7% fewer miles in June, the most recent statistics available, according to the U.S. Transportation Department. If the price of gasoline continues to fall that demand could come back just as quickly as it left. BP said it closed a third pipeline in Soviet Georgia and a continued lack of supply from that area would be bullish. There are currently two tropical depressions headed toward the gulf that could turn into storms by the weekend. Plenty of reasons for oil prices to firm from support at $112.

Jim Brown

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