Inventory induced hysteria. Oil prices surged to their highest prices since June as the stock-market and petroleum complex responded to an Energy Information Agency oil inventory shock drop of 8.4 million barrels. Oh sure there is no doubt that an 8.4 million barrel drop deserves some attention and some market enthusiasm, but I wonder if it should be to this extent of the firestorm that it set off yesterday. Does anyone ever read the fine print? The drop in supply was stunning but the drop in demand week over week should have been shocking as well. Did anyone stop to think that the numbers seem to suggest that this massive supply drop was a bit mysterious to say the least?
Where are the Hardy Boys and Nancy Drew when you need them. Let's start to unravel this mystery by trying to figure out why crude supplies fell. Did oil refiners all of a sudden get this sudden uncontrollable urge to make product? Well let's start by looking at the refinery runs. Last week's report show refiners were running at 85.9 percent of capacity. This week refinery runs fell to 84 percent. Refinery inputs fell from 14.8 million barrels a day to 14.5 million barrels day. Not quite the answer that we were looking for.
In fact what should have been more disturbing was the drop in product demand. Gasoline demand fell 300,000 barrels a day from the week before. Dow Jones Newswires gasoline demand in the 4 averaged 9.132 million barrels a day, lagging the adjusted year-earlier level by 0.1%.That's the first demand 4-week gasoline demand lagged the year-earlier level since May 29. Gasoline demand in the latest 4 weeks was the lowest since May 15, down 0.9% from a year earlier. Distillate demand dropped by 900,000 barrels a day! So if it was not demand driven then it must have been a drop due to do something else. Now we are getting closer to solving the mystery.
Why did crude imports drop so suddenly? You have to look where the biggest drop in supply was. It was in the Gulf Coast. Gulf coast supplies that had been hovering around the 182 million barrel plus for the last three weeks or so suddenly plunged to 175.8 million barrels. Hmm, I wonder what happened in the Gulf Coast last week that might have slowed oil tankers. Was it in part it might be because some crude was diverted to Europe due to higher a higher Brent price?
Was it because, as Reuters News theorizes, there was a steep premium for long-dated crude oil futures some traders may have temporarily park more barrels off the U.S. Gulf Coast in order to lock in a higher price down the road? Are traders just playing the contango holding off deliveries in anticipation of prices rising later? Reuters says that stocks of crude stored offshore fell to 50 million to 60 million barrels in June and part of July, but several sources recently put them around 70 million barrels and rising.
Or is it perhaps because refiners are using sweeter blends of crude due to higher heavy grade prices? Perhaps but then why are refinery runs are still falling?
You see my dear Watson, there is truth in all of these theories and they no doubt played a part of adding to this mystery but could the real answer be as elementary as the weather? There were two storms in the Atlantic and just after the reporting period, tropical storm Claudette, the third of the Atlantic hurricane season, formed in the eastern Gulf of Mexico and moved ashore within hours. Is it possible that tankers looking at the weather wanted to wait out these storms in the ocean instead of trying to beat a path into the Gulf ahead of the storms? And could the massive move in oil be a short squeeze and therefore part of the reason why the market reacted the way it did. In part it was an old fashion squeeze if you please?
Let's face it if oil was rallying because demand was surging or because supply was so tight any aberration might be critical but this drop in supply is not going to leave any refinery anywhere wanting. I do not think there is any refiner sitting around waiting for the ships to come in. Next week we will be waiting for oil's ship to come in! If I am right they will be coming in and the inventory induced mystery will be solved. Of course you do not have to sit around waiting for your ship to come in!
Sold October crude at apprx 7250 and stopped at apprx 7320.
Sell October crude at 7400 - stop 7600.
Sold September heating oil at apprx 19300 - stop 19700.
Sell September RBOB at 20500 - stop 20900.
Buy September natural gas at 270 - stop 248.
Sell Oct Crude 7450??
The Dan Flynn Corn & Ethanol Report
Did you believe the rally in the Energies yesterday ?
The weekly inventory numbers made the complex soar !
You must note we lacked imports that the market accrued to the bullish sentiment.
Did we have three count em three tropical storms which would hinder shipping and impact tankers from delivering product to port.
I also believe the stock market is over valued.
In last nights action the December Corn settled at 327 1/4 which was down 1/4 of a cent.
The range was 328 3/4 to 324 3/4.
I do expect a sell off after yesterdays technical bounce.
Energies are selling off as well after yesterdays strength.
Look for continued profit taking.