Supplies Plunge, Crude Back Over $100 - Analyst Blog

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The U.S. Energy Department's weekly inventory release showed that crude stockpiles fell sharply, as imports tumbled amid climbing refinery utilization rates. The report further revealed that refined product inventories - gasoline and distillate - both decreased from their previous week levels on strengthening demand.

The bullish data from the U.S. government, together with encouraging employment statistics and the ongoing unrest in Egypt that could destabilize the resource-rich Middle East and further tighten the global supply picture, has sent the commodity above $100 a barrel for the first time in 2013.

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

Analysis of the Data

Crude Oil: The federal government's EIA report revealed that crude inventories fell by 10.35 million barrels for the week ending Jun 28, 2013, following a marginal increase of 18,000 barrels in the previous week.

The analysts surveyed by Platts - the energy information arm of McGraw-Hill Financial Inc. ( MHFI ) - had expected crude stocks to go down some 3 million barrels. A sharp drop in the level of imports and uptick in refinery utilization rates led to the massive stockpile drawdown with the world's biggest oil consumer.

Though supplies decreased in each of the five reporting regions, crude inventories at the Cushing terminal in Oklahoma - the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange - bucked the trend and were up 392,000 barrels from the previous week's level to 49.65 million barrels. Stocks are currently 4.3% under the all-time high of 51.86 million barrels reached in Jan.

Despite the weekly inventory plunge, at 383.79 million barrels, current crude supplies are still 0.2% above the year-earlier level, and exceeds the upper limit of the average for this time of the year. The crude supply cover was down from 25.5 days in the previous week to 24.5 days. In the year-ago period also, the supply cover was 24.5 days.

Gasoline: Supplies of gasoline were down for the first time in 4 weeks, as domestic consumption strengthened and imports nosedived more than 50%. This was partially offset by a rise in domestic production.

The 1.72 million barrels withdrawal - contrary to analysts' projections for a 1 million-barrel increase in supply level - took gasoline stockpiles down to 223.66 million barrels. Notwithstanding this build, the existing inventory level of the most widely used petroleum product is 9.1% higher than the year-earlier level and is well above the top half of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) were down 2.42 million barrels last week, as against analysts' expectations for a 1.3 million barrels build in inventory level. The decrease in distillate fuel stocks - the third in 4 weeks - could be attributed to stronger demand and slightly lower production, somewhat negated by the effects of higher imports.

At 120.77 million barrels, distillate supplies are 2.6% above the year-ago level but is close to the lower limit of the average range for this time of the year.

Refinery Rates: Refinery utilization was up 2.0% from the prior week to 92.2%.

Stocks to Consider

With spot crude price pushing through $100 a barrel, brokerage analysts are likely to upgrade their forecasts on exploration and production (E&P) companies, leading to positive estimate revisions. While all oil-related stocks stand to benefit from rising commodity prices, companies in the E&P sector are the best placed, as they will be able to extract more value for their products.

In particular, one can look at PetroQuest Energy Inc. ( PQ ), Oasis Petroleum Inc. ( OAS ) and Sanchez Energy Corp. ( SN ) as good buying opportunities. These domestic upstream energy operators - sporting a Zacks Rank #1 (Strong Buy) - have solid secular growth stories with potential to rise significantly from current levels.

MCGRAW HILL FIN (MHFI): Free Stock Analysis Report

OASIS PETROLEUM (OAS): Free Stock Analysis Report

PETROQUEST ENGY (PQ): Free Stock Analysis Report

SANCHEZ ENERGY (SN): Free Stock Analysis Report

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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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