Crude oil price rose to as high as 72.52 Wednesday as driven by advance in stock markets amid the Fed Beige Book showed improved economic conditions. The benchmark contract ended the day +0.3% higher at 71.31. OPEC was within expectation with production staying the same. Industry-sponsored API’s report showed that crude oil inventory declined more than 7 mmb last week.
The 154th OPEC general meeting ended Wednesday in Vienna. As expected, the organization holding almost 40% of the world’s crude supply decided to keep production unchanged. At the press release, OPEC stated that ‘since the market remains over-supplied and given the downside risks associated with the extremely fragile recovery, the Conference once again agreed to leave current production levels unchanged for the time being’.
Concerning recent market development and rally in oil price, the organization believed ‘whilst there are signs that economic recovery is underway, there remains great concern about the magnitude and pace of this recovery, especially in the major industrialized nations of the OECD. There has been some easing of the overhang in crude oil stocks but market fundamentals remain weak, refinery utilization rates are low and product inventories have risen considerably’.
Another issue is compliance as strong level of adherence to quota in the beginning of the year has diminished in recent months. Surveys showed that compliance has dropped from over 80% to 68-70% over the past few months. Regarding this, OPEC Secretary General Abdulla Salem el-Badri reiterated member should adhere to their quotas while Algerian oil minister Chakib Khelil said that compliance is improving. However, Al-Naimi, Saudi Arabia’s oil minister said the OPEC does not need to put pressure on members regarding output as ‘people are complying anyway, 70% compliance is great’. Obviously, the world’s largest oil producer is satisfied with current price level.
API reported that crude inventory drew -7.22 mmb, compared with consensus of -1.57 mmb, to 336.3 mmb, in the week ended September 4 as imports dropped and refinery runs surged. Cushing stocks also drew -1.9 mmb during the week. However, both gasoline and distillate disappointed the market with inventories rising +0.57 mmb (consensus: -1.22 mmb) and +3.28 mmb (consensus:+0.82 mmb) amid falling demands.
The US Energy Department will report its findings today. The market forecast crude inventory dropped -1.6 mmb while gasoline stockpile drew -1.5 mmb. Distillate stockpile probably gained +0.88 mmb.
In the US, the Beige Book covering period from late July to end of August indicated growth in the third quarter. The Fed said that 11 out of the 12 regional banks reported signs of stable or improving economy during the period. Although the Fed described retail sales as ‘flat’ and employment as ‘weak’, the Government acknowledged recovery is on the way, albeit slowly.
Gold price pulled back and settled -0.3% lower at 997 yesterday on profit-taking. Silver price also closed lower. USD continued to retreat against major currencies with the dollar index dropping to 77.1. Against the euro and Swiss Franc, the greenback plunged -0.5% to 1.46 and -0.6% to 1.04, respectively. However, this failed to push precious metal higher during the day. In fact, as euro has soared to a 9-month high, near-term upside momentum has weakened and correction should follow. We also expect to see brief correction in gold price – consolidation before rally resumes.
US Oil Inventory
| Weekly change in inventory as of 04/09/09 | Change | Market Expectation | Previous |
| Crude oil | -1.60 mmb | -0.37 mmb | |
| Gasoline | -1.50mmb | -2.97 mmb | |
| Distillate | +0.88 mmb | +1.18 mmb |
Comparison between API and EIA reports:
API (Sep 4) | EIA (Sep 4) | |||||
Actual | Inventory | Previous | Forecast (using API’s inventory level) | Inventory | ||
Crude oil | -7.22 mmb | 336.3 mmb | -3.19 mmb | -7.39 mmb | 336 mmb | |
Gasoline | +0.57 mmb | 207.5 mmb | -2.81 mmb | +2.42mmb | 208 mmb | |
Distillate | +3.28 mmb | 165.1 mmb | +0.92 mmb | +1.54 mmb | 165 mmb |
API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey. Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.
Source: Bloomberg, API, EIA