Crude Futures Decline as U.S. Oil Inventories Rise Sharply

Strategic Insights -

Oil production remains ahead of weakening demand, causing crude futures to fall despite a slight increase in prices. The U.S. Energy Information Administration reported a significant 7.2 million-barrel rise in oil inventories for the week ended January 30, exceeding analysts' forecasts. This has led to a deeper discount for the front-month March contract, trading at $3.75 lower than April and other outer months, a market structure known as contango.

Key Takeaways:

  • U.S. oil inventories rose sharply by 7.2 million barrels in the week ended January 30, exceeding analysts' forecasts of a 2.9-million-barrel gain.
  • Stocks at Cushing, Okla., increased by 800,000 barrels to a record 34.3 million barrels, reflecting a backup from an outgoing pipeline that was shut down for the first half of the week.
  • The build in oil inventories is causing the front-month March contract to trade at a deeper discount to April and other outer months, known as contango.
  • March's discount to April widened by 50 cents to $3.75 after the inventory data release.
  • Analysts, including Mike Zarembski of optionsXpress, predict that until contango starts to narrow, it will be difficult for crude to sustain a major rally.
  • Refined products supplied, the EIA's proxy for oil demand, fell by 2.8% in the four weeks ended January 30, compared with drops of 4% or more in recent weeks.
  • Gasoline stocks rose by 300,000 barrels, less than the 600,000-barrel build anticipated by analysts.
  • Distillate stocks, including heating oil and diesel, fell by 1.4 million barrels, matching analyst forecasts.
  • March reformulated gasoline blendstock trades up 4.11 cents, or 3.5%, at $1.2081 a gallon.
  • March heating oil trades 1.14 cents, or 0.9%, higher at $1.3368 a gallon.

Statistics:

  • Oil inventories rose by 7.2 million barrels in the week ended January 30.
  • Analysts forecasted a 2.9-million-barrel gain, exceeding expectations by 4.3 million barrels.
  • Stocks at Cushing, Okla., increased by 800,000 barrels to a record 34.3 million barrels.
  • March's discount to April widened by 50 cents to $3.75.
  • Refined products supplied fell by 2.8% in the four weeks ended January 30.
  • Gasoline stocks rose by 300,000 barrels.
  • Distillate stocks fell by 1.4 million barrels.

Sources:

  • Dow Jones Commodities News via Comtex, February 4, 2009.
  • U.S. Energy Information Administration.
  • optionsXpress, a brokerage in Chicago.