Wednesday, July 22, 2009

Nothing bullish in crude

From FT Alphaville:

Stephen Schork of the Schork report makes an excellent point regarding recent large US inventory crude draws.

As he explains, with reference to contango:

In other words, the market is paying you to build supplies by virtue of the discount on nearby material. If the recent run-up in price was based on real demand for wet barrels, then this discount would disappear, i.e. the market would be moving from contango toward backwardation. That is not the case at this time. Thus, the ongoing drawdown in U.S. crude oil supplies (outside of Cushing) is not demand driven, but rather a function of lower domestic production and fewer imports. In other words, refiners, as any good grocer would tell you, are aggressively emptying the shelves, as it were, of surplus material.

He goes on:

Thus, what is so bullish about the current string of crude oil draws in the U.S.?

Not much.

Which leads us to the conclusion that the current uplift in prices to about $65 per barrel is more likely the result of a little rational exuberance in connection with the equity stampede than a fundamental turnaround (yet again).

This is somewhat confirmed by Tuesday’s API data, which showed a reversion to large crude stockbuilds in the last week alongside further refinery run cuts, and a larger than expected build in gasoline stocks.

The point is that in the much longer term, yes, fundamentally the view is bullish....MORE