Wednesday, August 19, 2009

An Interesting Explanation for the US Inventory Drop

The markets were shocked to learn of a steep drop in US inventories last week, a 8.4 million-barrel drop as a opposed to the 1.5 million-barrel expected. Turns out demand had little do to with it:

The surprise drop fed into expectations that the U.S., the world's biggest
oil consumer, would start using more crude as the country's economy pulls out of

However, a big decline in oil imports, to an 11-month low, had more to do with the decline in U.S. inventories than rising demand. Owners of oil being stored in tankers at sea had little incentive to bring their cargo to shore last week, as the front-month futures contract traded at a big enough discount to outer months to make it more profitable to store oil for future sale.

"This rally may not be sustainable until the demand side of the equation has improved, and we haven't seen that yet," said Gene McGillian, an analyst with Tradition Energy in Stamford, Conn. Still, he said the market's rebound on the data "is a little stronger sign of confidence developing and I think there's more risk of upside than downside at this point."

U.S. demand for refined products averaged over the last four weeks did rise to its highest point since March 20, though consumption was still down 2.2% from a year earlier, the DOE said. Even after the big drop last week, inventories are still 16% above this time last year.

The failure of futures to set a new 10-month high indicates that some skepticism remains over whether a recovery will begin to reduce the oil glut in the next few months.

- Brewskie

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