UBS Warburg: Oil stock data 'inconsistent'

The latest American Petroleum Institute report of a larger-than-expected draw-down of US oil inventories is flawed by "inconsistent data" that should temper any bullish market sentiment, pending clarification, officials at UBS Warburg LLC, Stamford, Conn., said Wednesday.

May 15, 2002

3 min read

By OGJ editors

HOUSTON, May 15 -- The latest American Petroleum Institute report of a larger-than-expected draw-down of US oil inventories is flawed by "inconsistent data" that should temper any bullish market sentiment, pending clarification, officials at UBS Warburg LLC, Stamford, Conn., said Wednesday.

API reported late Tuesday that US crude stocks fell almost 7.4 million bbl to 313.7 million bbl last week, while gasoline inventories increased nearly 2.1 million bbl to 216.5 million bbl. Distillate fuel oil stocks also gained, by 1.6 million bbl to 122.4 million bbl during last week. US refineries were operating at 92.5% of capacity during that period, down slightly from 93.2% the previous week (OGJ Online, May 15, 2002).

However, officials at UBS Warburg noted that the bulk of last week's draw-down of crude stocks—4.6 million bbl—was concentrated in US Petroleum Administration for Defense District (PADD) 5, which encompasses the US West Coast, plus Alaska and Hawaii. That, they said, reflected "both volatile Alaska North Slope crude-in-transit data and reports of traders struggling to replace lost cargoes from Iraq," following that country's embargo of oil exports during April.

Meanwhile, UBS Warburg officials said, "[US oil] inventories tightened for a fifth consecutive week in the critical PADD 2 [Midwest] region, falling to 63.6 million bbl. This is reflected in recent West Texas Intermediate [futures] prices—which settled at an 8-month high $29.36/bbl on Tuesday—and the steep backwardation of New York Mercantile Exchange crude futures."

With imports of foreign crude into the US essentially unchanged at 9.3 million bbl last week, UBS Warburg said, "The recent strength in WTI prices is likely to draw additional imports in coming weeks, helping to offset the impact of the 1-month Iraq embargo."

Officials said, "In total, US crude and product inventories fell 4.2 million bbl week-to-week, remaining comfortably in the middle of their 5-year range."

Nevertheless, they said, "This week's data is likely to add to the recent pressure on refining margins." They pointed to the primary factors, including:

-- The fourth consecutively weekly increase in US refined products.

-- Weaker demand this year for all products except gasoline.

-- The inability of US refiners to pass on their rising crude costs.

US gasoline inventories increased last week, despite a 131,000 bbl decline in US gasoline production and essentially unchanged import volumes. That signaled to UBS Warburg officials an "implied" decline in US gasoline demand "to only 8.2 million b/d despite the approach of peak driving season."

They said, "With refiners striving to maximize gasoline production [with gasoline yields at 55-57%] and despite some talk of capacity sparing, overall operating rates remain too high to substantially reverse the recent margin erosion."