Oil Companies Could Benefit If Oil Inventory Overhang Eases

Latest data suggests that the persistent inventory overhang weighing on crude oil prices may be easing. With gasoline demand surprisingly strong in the face of continued economic gloom and oil imports beginning to come down, today’s report by the Energy Information Administration (EIA) has helped improve sentiment.

It remains to be seen, however, if the favorable developments over the last two weeks on the inventory front can be sustained going forward. If this trend continues, oil prices will most likely start consolidating in the mid to high $40’s range over the coming days. This should benefit names like Exxon (XOM), Chevron (CVX), Transocean (RIG) and Schlumberger (SLB).

The agency reported a lower-than-expected build in total commercial crude oil stocks of 0.7 million barrels from the preceding week. Current stocks are 13.8% above the comparable period last year. The supply cover continues inching up, with current stock levels sufficient for 24.9 days of supply, significantly above the year-earlier level of 21.2 days.

The 4-week average of total refined products supplied, a proxy for petroleum demand, was down 0.8% from the year-earlier level. While distillate and jet fuel demand remains below year-earlier levels, gasoline demand remains surprisingly resilient, up 1.7% year over year. Total motor gasoline inventories dropped by a greater-than-expected 3.4 million barrels from the previous week, with current stocks now in the lower half of the 5-year range.

The latest data points on the above chart from the EIA shows that the growth in inventory build is leveling off. Despite these positive recent developments, currently inventory levels remain significantly above the 5-year range (the shaded portion).

At Cushing , Oklahoma — the official delivery point for the NYMEX futures contract — crude oil stocks are coming down. For the week ended February 20, total stocks at Cushing dropped 0.4 million barrels from the previous week to 34.5 million barrels. At current levels, stocks at this critical junction remain 104% above the year-earlier level.

The heavy supply overhang at Cushing has been a major contributing factor to the current discount at which the benchmark U.S crude, West Texas Intermediate (WTI), is trading relative to Brent, the European benchmark crude. Typically, WTI trades at a premium to Brent.

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