Oil Prices Retreat as Investors Await Inventory Report

WTI crude oil price fell for the first time in 6 days, pulling back to 88 in European session, as investors awaited the US inventory report. The industry-sponsored American Petroleum Institute said yesterday that crude inventory increased +5.13 mmb to 352.18 mmb in the week ended August 26. For oil products, gasoline stockpile fell -3.11 mmb to 210.80 mmb while distillate added +0.28 mmb to 153.11. The market expects the DOE/EIA will report a -0.5 mmb and -0.95 mmb drops in crude and gasoline inventories respectively. Distillate stockpile probably rose +0.9 mmb.

Brent crude initially climbed higher to 114.65 but then faltered to 113.55, probably on profit-taking after the 6 days rally. Expectations that oil production in Libya might soon resumed have eased concerns over output tightness. Italy's Eni SPA signed a memorandum of understanding with Libya's National Transitional Council ( NTC ), pledging to create 'the conditions for a rapid and complete recovery of Eni's activities in Libya'. Eni was the largest foreign producer in Libya. Before the civil war broke out, Eni was producing 273K bpd of oil equivalent in the country. The 2 parties are committed to 'doing all that is necessary to restart operations on the Greenstream pipeline [by mid-October], bringing gas from the Libyan coast to Italy'.

As we mentioned before, 85% of the Libya's oil is exported to Europe, including Italy, France, Germany and Spain. Suspension of output over the past 6 months has affected European refineries. Yet, even if oil production in Libya can be resumed on schedule, we do not expect a full return of the country's 1.6M bpd production this year and not even next week. Indeed, we are only looking for 15-30% of production to return to normal over the coming half year.

Concerning macroeconomic data, Eurozone's unemployment rate unexpectedly rose to 10% in July from 9.9% a month ago. For Germany, the jobless rate stayed unchanged at 7% in August but the number of unemployed dropped -8K in August from -10K in the prior month. As expected, preliminary CPI rose +2.5% y/y in August, same as July's reading but remained above ECB's +2% target.

Weekly change in inventory as of 26/08/11 Change Consensus Previous
Crude oil -0.50 mmb -2.21 mmb
Gasoline -0.95 mmb +1.36 mmb
Distillate +0.90 mmb +1.73 mmb

Comparison between API and EIA reports:

API (Aug 26) EIA (Aug 26)
Actual Inventory Previous Forecast (using API's inventory level) Inventory
Crude oil +5.13 mmb 352.18 mmb -3.34 mmb +0.41 mmb 352 mmb
Gasoline -3.11 mmb 210.80 mmb +6.37 mmb -0.34 mmb 211 mmb
Distillate +0.28 mmb 153.11 mmb +2.00 mmb -2.59 mmb 153 mmb

API collects stockpile information on a voluntary basis from operators of refineries. Data from the API and DOE have moved in the same direction 71% of the time over the past 52 weeks

Source: Bloomberg, API, EIA

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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