Cold Weather Won’t Help Oil Prices

Featured here are the following stocks: ExxonMobil, Chevron, Schlumberger and Transocean.

In its weekly inventory report released earlier today, the Energy Information Administration (EIA) reported that commercial crude oil stocks totaled 326.6 million barrels for the week ended January 9, 2008. This represents a better-than-expected inventory build of 1.2 million barrels. Current crude oil inventories, excluding the Strategic Petroleum Reserve, are now 13.8% above the year-earlier level, highlighting the imbalance between growing supplies and shrinking demand. Current stocks provide for 22.6 days of supply, significantly above the year-earlier level of 18.7 days.

As the above EIA chart shows, current inventories remain above the 5-year average (the shaded region represents the 5-year range). While the overall inventory build came in better than expected, the build at Cushing, Oklahoma — the official delivery point for the NYMEX futures contract — reached a new record of 33 million barrels, double the year-earlier level of 16.5 million barrels.

In refined products, gasoline inventories increased 2.1 million barrels, providing for 23.9 days of supply, up from gasoline stocks providing 23 days of supply this time last year. Distillate stocks, which includes heating oil, increased a greater than expected 6.4 million barrels, taking current inventories above the high point of the 5-year range and 11.1% above the year-earlier level. The above-average distillate stock-build dashed hopes of weather support to prices given the chilly weather in the heating oil consuming regions.

This is another addition to the growing list of negative news for crude oil prices, which have been unable to get support from OPEC’s extraordinary cut of more than 2 million barrels. The growing inventory levels, both in the U.S. as well as in the other OECD markets, reflect falling demand due to the uncertain economic times. It will be hard for the commodity to stabilize and consolidate given this lack of visibility on the economic front.

Having said that, we believe that further downside risk is limited than the upside potential from current levels. We would take advantage of the weakness in energy stocks in the face of such bearish reports to make new positions or add to existing ones in such quality energy names, as ExxonMobil (XOM), Chevron (CVX), Schlumberger (SLB) and Transocean (RIG).

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