Oil: Still Waiting for an Inventory Boost

by Rick Olivere, CFA

3:48:00 PM November 08, 2000 GMT

The American Petroleum Institute (API) has released data for the week ending Nov. 3 showing that crude oil inventories had an unexpectedly small increase of 35,000 barrels (bls). The Energy Information Administration (EIA), in contrast, showed an unexpected decline of 1.5m bls.

With a 1.3m bls increase in heating oil and diesel fuel, heating oil inventories on a national basis are now 31.5% below a year ago, compared with 34% down a week ago. Despite four oil production increases totaling 3.7m bls, no material buildup in crude oil or heating inventories has yet occurred.

We believe that investorsB fear of a significant decline in the price of oil to the mid $20s is becoming increasingly less likely to be realized. We are increasingly drawn to the disconnect between current prices of oil ($32) and natural gas ($5.10), and the market prices of the shares of producers of oil and natural gas.

Our Buy recommendations and target prices of energy and energy service stocks are included our recent review of the weekly rig surveys.

The API statistics showed a second week in which gasoline inventories declined 1.1m bls to 189.6m bls. We will be monitoring this in coming weeks as declining or stable gasoline inventories, along with stable heating oil inventories, may serve to hold oil prices up in the spring season, when oil prices decline seasonally. In this case, the seasonal decline in oil prices might be tempered if refiners bid for crude oil to build gasoline inventories for demand during the summer driving season.

Refinery utilization for the week to Nov. 3 fell to 93.8% from 94.3%. We continue to note that increased crude oil supplies from imports or from the Strategic Petroleum Reserve have not led to an increase in inventories of heating oil or of crude oil. We think this points to the imbalance between robust demand for refined products such as heating oil and strained refinery capacity of about 16m b/d. This domestic capability has not increased; in fact, it declined from 19m b/d because of operating losses in refining, as well as environmental requirements.

We continue to highlight the shares of refiners, such as Amerada Hess [AHC: NYSE] and Valero [VLO: NYSE]. Both companies have revenue and earnings exposure to refining heating oil.

We believe the current level of OPEC production of 29.5m b/d (including Iraq) points to the vulnerability of the global economy to production disruptions or spikes in demand related to winter weather. Excess crude oil production capacity is less than 2m b/d, and it resides in two countries: Saudi Arabia and the United Arab Emirates (UAE).

Royal Dutch [RD: NYSE] has announced a halt of 250,000 b/d in exports from Nigeria because of tampering with pipelines. Also, Iraq has announced a halt of an unspecified amount of oil exports through the Turkish port of Ceyhan.

Our conclusion continues to be that the imbalance between demand and supply is likely to become clearer in coming weeks as winter weather arrives. This give an additional boost to our thesis that sustained higher cash flows from the production of oil and natural gas are likely to drive a multi-year cycle of drilling activity.

http://ww1.broadcast.com/business/tellsoft/47/02.ram

-- Martin Thompson (mthom1927@aol.com), November 08, 2000

Answers

U.S. week to Nov 3 crude stocks down 1.6 mln barrels to 282.5 mln -- DOE Source: AFX Publication date: 2000-11-08

WASHINGTON (AFX) - Crude oil stocks fell 1.6 mln barrels to 282.5 mln in the week ended Nov 3 from the previous week, the Department of Energy (DOE) said.

The DOE data compares with an estimate released yesterday by the American Petroleum Institute, a private trade association, that crude oil stocks rose 35,000 barrels to 281.7 mln.

Year-on-year, crude oil stocks were down 21.2 mln barrels, DOE said. The API estimated that crude oil stocks were down 29.8 mln barrels year-on-year.

Crude oil imports rose 8,000 barrels to 9.3 mln bpd, according to DOE. The API estimated that crude oil imports rose by 167,000 barrels to 9.7 mln barrels.

Gasoline stocks fell 2.0 mln barrels to 186.1 mln, DOE said. The API estimated a decrease of 1.1 mln barrels in gasoline stocks to 189.6 mln barrels.

The government said gasoline stocks were down 18.1 mln barrels year- on-year. This compares with the API's estimate of a 4.8 mln barrel fall in gasoline stocks year-on-year.

Distillate fuel stocks rose 2.1 mln barrels to 115.7 mln for the week, the department said, compared with the API's estimate of a 1.3 mln barrel rise to 115.2 mln.

Distillate fuel stocks fell 23.1 mln barrels year-on-year, larger that the API's estimate of a 20.2 mln barrel decrease.

Oil refineries operated at 93.0 pct of capacity, down from 93.5 pct in the previous week, said the DOE. According to the API, refineries operated at a 93.8 pct rate, down from 94.3 pct the previous week.

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp? story_id=15604366&ID=cnniw&scategory=Energy

-- Martin Thompson (mthom1927@aol.com), November 09, 2000.

Yes, this imbalance will become real clear in the coming weeks.

-- Uncle Fred (dogboy45@bigfoot.com), November 09, 2000.

A rise in inventory that small won't help much.

-- Buck (bigbuck@trailways.net), November 09, 2000.