London, 12 August 2010

The U.S. oil market is starting to groan under the weight of a huge stockpile of crude and refined products, capping the rally and putting both flat prices and the crack spreads under pressure. Combined inventories of crude oil and refined products in commercial storage rose 136,000 barrels in the week to Aug 6, according to the latest survey by the Energy Information Administration ( EIA), the statistical arm of the U.S. Department of Energy.

The increase was the smallest for almost two months. But it still leaves combined inventories at a massive 1.125 billion barrels -- 3.5 million higher than at the same time last year (when the market was clearly flooded after the recession) and just 2.1 million below the record high set back in 1990, when the EIA started publishing the current series

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Crude stocks fell 3 million barrels, the second weekly decline, but it still leaves them 3 million barrels above last year's already-flush level. The real problem remains the overhang of refined products. Product stocks rose another 3.1 million barrels last week, led by increases in gasoline (up 409,000 bbl), distillates (3.5 million bbl), residual fuel oil (694,000 bbl) and propane/propylene (2.3 million bbl).

The only significant draws were "other oils" (down 2.4 million bbl), "unfinished oils" (632,000 bbl) and jetfuel (1.1 million bbl). The build up of refined products has become unsustainable.

Gasoline stocks are now 11.5 million bbl above yearago levels, while the surplus in distillate is 10.9 million barrels, and resid is up 6.3 million bbl. Crack spreads have started to respond as the market tries to force refinery shut-ins.

The benchmark 3-2-1 crude-gasoline-distillate crack has fallen to just over $7 per barrel, from almost $10 at the start of August. Front-month crack spreads are the narrowest for six months.

It is unlikely a hurricane will cause widespread shutdowns of the refining complex to help rebalance the market. So with the U.S. economic recovery slowing, refiners will have to commence an unusually deep and prolonged maintenance season to work off excess inventories, and hope for a cold winter. The outlook for oil demand in the rest of Q3 and Q4 is weak.

Ends --

By John Kemp, Reuters market analyst - for Commodities Now.

The views expressed are his own.

Attachments:

CRUDE+PROD.pdf	223 Kb
CRUDE.pdf	179 Kb
GASOLINE1.pdf	190 Kb
PRODUCTS.pdf	262 Kb