An Unexpected Inventory Build Failed to Weigh on Crude Oil Prices

Crude oil prices were higher on Wednesday, following the Department of Energy’s report on petroleum inventories. Prices have experienced tailwinds recently as trader’s focus on geopolitical issues, especially the recent comments made by the White House about the Iran nuclear agreement. A small dip in refinery operations this week to 90.8% which is down from last year at (94.1%) led to a surprise build in crude oil inventories.

Technicals

Crude oil moved higher hovering near the 68-handle on Wednesday ahead of the close. Short term support is the former breakout level at 66.66, and then an upward sloping trend line that comes in near 63.19. Resistance is seen near the April highs at 69.56. Positive momentum is decelerating as the MACD (moving average convergence divergence) histogram is printing in the black with a declining trajectory which points to consolidation. The fast stochastic is hovering near the 80-oversold trigger level which could foreshadow a correction.

Refinery Utilization Slipped

The EIA reported that U.S. crude oil refinery inputs averaged over 16.6 million barrels per day during the week ending April 20, 2018, 328,000 barrels per day less than the previous week’s average. Refineries operated at 90.8% of their operable capacity last week. Distillate fuel production decreased last week, averaging 5.0 million barrels per day.

Imports Rose

Imports rose according to the DEO inventory report. U.S. crude oil imports averaged about 8.5 million barrels per day last week, up by 539,000 barrels per day from the previous week. During the last month crude oil imports averaged over 8.2 million barrels per day, 1.5% more than the same four-week period last year. Gasoline imports last week averaged 896,000 barrels per day. Distillate fuel imports averaged 123,000 barrels per day last week.

Inventories Increased

The EIA revealed that U.S. commercial crude oil inventories unexpectedly increased by 2.2 million barrels from the previous week. Expectations were for a small 1-million-barrel draw. Gasoline inventories increased by 0.8 million barrels last week, which was in line with expectations. Distillate fuel inventories decreased by 2.6 million barrels last week and compared to the small build expected. Total commercial petroleum inventories increased by 1.4 million barrels last week.

Demand is Strong

Demand remains strong according to the EIA report. Total product demand over the last month averaged about 20.4 million barrels per day, up by 4.3% year over year. Over the last months, gasoline demand averaged about 9.4 million barrels per day, up by 1.3% from the same period last year. Distillate fuel demand averaged over 4.0 million barrels per day over the last month, down by 2.5% from the same period last year.

Producer sentiment is moderating

Producer sentiment is moderating from the cycle-highs, which could weigh on crude oil prices. The Empire State headline fell to 15.8 from 22.5, though the Philly Fed headline rose to 23.2 from 22.3, though both slipped on an ISM-adjusted basis, to 56.2 from 57.3 for Empire, and to 59.7 from a 45-year high of 61.8 for Philly. Despite the April pull-back, sentiment remains at remarkably firm levels, and we expect the ISM-adjusted average of the major measures to edge down only slightly, to 57 in April from 58 in March and February.

Weaker component data in the early month producer sentiment releases points towards some easing in the overall level of producer sentiment in April. The Empire State and the Philly Fed both posted declines for their ISM-adjusted measures despite an uptick in the Philly Fed headline. After a seven month run of strength through March, we expect only a slight easing in sentiment, with the ISM-adjusted average of all measures dipping to 57 in April form 58 in both March and February.