Oil Prices Rally On Supply Expectations (USO, OIL, DBO, UCO, DBE, USL, DTO, SCO, DNO, OLO, BNO, SZO, UHN, OIH)

U.S. oil inventories declined for the third straight week, according to the weekly status report released by the U.S. Energy Department this morning. Government data showed commercial stocks decreased by 2.2 million barrels to 333.1 million.

The report had little effect on oil futures, which traded between $91 and $92 a barrel overnight following Tuesday’s run-up of nearly $2.

After Tuesday’s day-session settlement, the American Petroleum Institute released its weekly supply estimates showing a build of 57,000 barrels in commercial crude inventories. Sell-side and independent analysts expected a larger decline between 300,000 and 1.4 million barrels.

This morning, the Energy Department reported a 5.1-million-barrel increase in gasoline inventories—a middling number given the API’s estimate of a 7.0-million-barrel build and the Street’s forecast of a 1.8- to 2.1-million-barrel gain.

The government data on distillate fuel inventories was also more bearish than industry and analysts’ expectations. Stocks increased by 2.7 million barrels vs. the API’s 1.5-million-barrel estimate and the 1.0-million-barrel uptick anticipated by Oil Patch watchers.

The Energy Department also noted a slowdown in refinery operations last week. Utilization fell from 88.0 percent of operable capacity to 86.4 percent. Average daily gasoline production declined to 8.7 million barrels, while the manufacture of distillate fuels slipped to 4.5 million barrels.

Gasoline demand increased to a daily average of 9.1 million barrels, 1.9 percent higher than a year ago. The year-over-year increase in distillate fuel consumption was more dramatic. Distillate demand—at 3.8 million barrels daily—is 3.6 percent better than this time last year.

Trading Week

Refiners’ margins improved this week due to outsized gains in product prices. For the week ending Tuesday, West Texas Intermediate crude rose 1.9 percent, while gasoline gained 2.3 percent and heating oil advanced 2.5 percent. Operations running gasoline-heavy mixes enjoyed a 1.4-point boost in their margins to 16.7 percent. Distillate-heavy refining runs earned 17.6 percent, a 1.6-point gain over last week.

Average daily volume for NYMEX WTI futures jumped 194.9 percent to 969,338 contracts. Open interest climbed by 11,452 contracts to 1.478 million.

Expected oil volatility tracked by the CBOE Oil Volatility Index (CBOE: OVX) fell 2.3 points to 28.0 percent as the cost of protective puts eased 2.2 percent.

The heating oil/gasoline spread widened 2.49 cents a gallon in favor of the heavier distillate, though gasoline is still trending toward a seasonal outperformance that typically peaks in late spring.

The corn/ethanol crush gained 1.96 cents a bushel as input corn prices tumbled 14.5 cents. Ethanol’s 30-day correlation to corn prices rose to 78.0 percent from 74.1 percent. Gasoline traded at a 28.08-cent premium to ethanol vs. 19.90 cents a gallon last week.

Brent crude oil widened its spread over WTI from $3.05 a barrel to $5.40 this week. The quarterly contango in the WTI market swelled from $2.17 to $3.16 a barrel. Excess carry averaged 2.2 percent per annum this week.

ETF Daily News Notes Some Oil Related ETFs: United States Oil Fund (NYSE:USO), iPath S&P GSCI Crude Oil (NYSE:OIL), PowerShares DB Oil (NYSE:DBO), ProShares Ultra DJ-UBS Crude (NYSE:UCO), PowerShares DB Energy (NYSE:DBE), United States 12 Month Oil (NYSE:USL), PowerShares DB Crude Oil Dble (NYSE:DTO),  ProShares UltraShort DJ-UBS (NYSE:SCO), United States Short Oil (NYSE:DNO), PowerShares DB Crude Oil Long (NYSE:OLO), United States Brent Oil (NYSE:BNO), PowerShares DB Crude Oil Short (NYSE:SZO), United States Heating Oil (NYSE:UHN), Oil Services HOLDRs (NYSE:OIH).

Technical Picture

Crude oil rebounded from a test of its 50-day moving average last week, though the MACD indicator hasn’t completely reversed to the upside. The nearby continuation contract has successfully worked its way through the 50 percent retracement level of its 2008 decline at $90.36, putting a bullish objective of $103.79 in play.

More immediately, support can be expected at $89.56 and $88.02, while resistance is likely at $92.02 and $92.93.

Nearby NYMEX WTI Crude Oil

Nearby NYMEX WTI Crude Oil

Written by Brad Zigler From Hard Assets Investor

HardAssetsInvestor.com (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.


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