August 27, 2003

We wish to provide you with our customary cursory review of the weekly DOE inventory data.  Looking first at crude oil, the DOE reported a stock decline of 200,000 barrels, which included builds in PAD II of 500,000 barrels and in PAD III of 2.3 million barrels.  A decline of 2.3 million barrels in PAD V helped offset to lead to the modest decline in the aggregate.

Refinery crude oil runs fell by 234 MB/D from the prior week, roughly in line with our expected impact from the blackout.  Gross imports increased by 378 MB/D and averaged over 10.2 MMB/D.  Included in the total were apparently additional volumes from Iraq, although somewhat reduced from the week before.

Adding up the numbers and including estimated domestic production suggests there “should have been” an aggregate build of almost 3.7 million barrels, but clearly the volatility in PAD V helped accounted for the discrepancy.  Overall, however, the latest crude oil data remain in line with our forecast U.S. refinery balances.

Turning next to gasoline, the DOE reported a substantial decline of 5.7 million barrels, including a drop in reformulated supplies of 1.1 million barrels. 

Refinery production of total finished gasoline fell by 213 MB/D reflecting outages from the blackout, while gross imports declined by 97 MB/D from the prior week to average 811 MB/D.

Implied gasoline demand increased by 343 MB/D form the previous period to average almost 9.7 MMB/D.  The jump implied gasoline demand increased by 343 MB/D form the previous period to average almost 9.7 MMB/D.  The jump reflected the normal pre-holiday secondary stocking in the week prior to the actual surge in consumption.

The combination of a reduction in supply and higher pre-holiday implied demand thus accounted for the aggregate inventory decline. 

Of greatest significance, however, is the fact that the market is demonstrating, at least for today, the classic example of “buy the rumor, sell the fact”.  The market is appropriately recognizing that the fall in refinery output was a temporary phenomenon, and also recognizing the influence of secondary stocking prior to a major holiday.

The spread between gasoline and crude oil on the NYMEX had already widened significantly, and given the fact that the most recent CFTC gasoline data indicated there was “no one left to buy”, traders have started selling the gas cracks, anticipating that next week’s data may reflect a more “normalized” balance.

Our research has also suggested a general seasonal tendency for gas cracks to ease by mid to end September from levels prevailing immediately prior to Labor Day.

Finally, the DOE reported that distillate stocks rose by 700,000 barrels.  Refinery distillate production rose by 114 MB/D while gross imports fell by 99 MB/D from the prior week.

Implied distillate demand rose by 94 MB/D, and overall the distillate data provided no surprises.  

William H. Brown, III