Oil Rally Supported By Inventory Drawdowns

The better-than-expected report from the Energy Information Administration (EIA) and the expected outcome of the OPEC meeting in Vienna is helping crude oil sustain its recent price momentum. However, given the commodity’s impressive recent gains, we would view pullbacks in the coming days as healthy for the rally’s long-term sustainability.

In terms of investments, we continue to advocate early-cycle leverage through oilfield service names, such as Weatherford (WFT: 20.13 0.00 0.00%) and Ensco (ESV: 37.64 0.00 0.00%). Our long-term favorites remain Exxon (XOM: 69.23 0.00 0.00%), Schlumberger (SLB: 56.35 0.00 0.00%) and Diamond Offshore (DO: 81.71 0.00 0.00%).

In its weekly status report Thursday, the Energy Information Administration (EIA) reported a greater-than-expected drawdown in crude oil inventories. The agency reported a drawdown of 5.4 million barrels from the preceding week. A major contributing factor to the heavy inventory drawdown was a greater-than-expected increase in refinery utilization to 85.1% from 82.3% in the preceding week.

Current crude oil stocks are 16.5% above the year-earlier level and remain above the upper limit of the average for this time of the year, as is shown in the chart below from the EIA. The supply cover dropped from the previous week to 25 days of supply, through it remains significantly above the year-earlier level of 20.7 days.

The drawdown in gasoline inventories was less than expected at 0.6 million barrels. However, current gasoline inventories, at 203.5 million barrels, are below year-earlier levels and remain below the lower-end of historical range, as shown in the next chart from the EIA. This is expected to help support further gains in gasoline prices in the coming days.

Offsetting gasoline’s tight supply fundamentals will be continued weak demand and increasing refinery utilization. The demand picture also remains very weak. Total refined products supplied over the last four-week period, a proxy for overall petroleum demand, was down 7.3% from the year-earlier period, with gasoline down 0.4%, distillates (includes diesel) down 9.9% and jet fuel down 9.1%.