Crude Oil Price Failed to be Lifted by Inventory Draw, Signaling Fundamental Weakness

US economic data released yesterday was largely inline with market expectation. Although decline in Case/Shiller house price index fell more than expected (-5.3% yoy vs consensus of -5%) in November, it's the smallest decline in 2 years. Investors may still feel uncomfortable about the housing market because there are a large amount of foreclosures set to enter the market. Moreover, the impact of first-time homebuyer tax credits remains uncertain. It may be too early to say prices have bottomed.

The Conference Board reported that consumer confidence improved to 55.9 in January, compared with market expectations of 53.5 from an upwardly revised 53.6 in the prior month.

The IMF's comments about global recovery also turned off risk appetite. At the latest 'World Economic Outlook 'the world lender said that nature of the recovery remains 'fragile' although it upgraded the growth forecasts. Also, it raised concerns about sovereign risk, saying 'high fiscal deficits and debt are raising concerns about sustainability and sovereign risk--which is the primary consideration in many countries'. The IMF currently anticipates global economic will expand +3.9% in 2010, followed by +4.3% in 2011. These are compared with previous estimates of +3.1% and +4.2% respectively. Once again, emerging and developing economies will be the growth driver.

The industry-sponsored API estimated crude inventory dropped -2.2 mmb to 327.7 mmb in the week ended January 22. Distillate stockpile also dropped -2 mmb following a -3.4 mmb decline in the previous week. However, gasoline demand remained weak and pushed inventory level higher by +0.92 mmb.

The US Energy Department will report the official data today. The majority of analysts expected +1.4 mmb and +1.1 mmb builds in crude oil and gasoline stockpiles. However, that of distillate probably dropped -1.7 mmb.

Performance in precious metals was mixed. While gold edged higher, silver and PGMs continued to fall. We believe it was also resulted from speculations on Chinese tightening. As Chinese banks began curbing new lending, it would lead to decline in manufacturing activities. Demand for metals with extensive industrial applications would get hurt.

Weekly change in inventory as of 22/01/10
Change
Market Expectation
Previous

Crude oil
 
+1.40 mmb
-0.47 mmb

Gasoline
 
+1.10 mmb
+3.95 mmb

Distillate
 
-1.70 mmb
-3.26 mmb

Comparison between API and EIA reports:

API (Jan 22)

EIA (Jan 22 )

Actual
Inventory
Previous

Forecast (using API's inventory level)
Inventory

Crude oil
-1.80 mmb
327.7 mmb
-1.80 mmb

-2.57mmb
328 mmb

Gasoline
+0.92 mmb
228.4 mmb
+0.67 mmb

+0.56 mmb
228 mmb

Distillate
-2.00 mmb
161.4 mmb
-3.40 mmb

+3.86mmb
161 mmb

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.  

Source: Bloomberg, API, EIA