(Robert Campbell is a Reuters market analyst. The views expressed are his own)
By Robert Campbell
NEW YORK, May 16 (Reuters) - This week’s U.S. government oil inventory data have placed a tempting morsel on the trigger of a big bull trap in the gasoline market. It should be sprung shortly.
Persistent declines in U.S. gasoline inventories have finally eroded the year-on-year surplus in stocks, pushing supplies to a 1.6 million barrel deficit when compared to the same week in 2011.
It looks like a signal for fresh buying. Or is it? Examined more closely, the data show plenty of evidence that this could be a bad time indeed to go long gasoline.
Take the supply deficit. U.S. gasoline supplies are only lower than last year due to extra-ordinary tightness in the geographically isolated West Coast market.
Gasoline stocks in PADD 5 stand at only 25.3 million barrels, down sharply from last year’s reading of 31.8 million barrels, largely due to a severe refinery problems.
Elsewhere the picture is not so grim. Stocks on the East Coast are still in surplus when compared with 2011 to the tune of 2.9 million barrels.
The situation is similar on the Gulf Coast where stocks are at a 1.8 million barrel surplus.
So the supply standpoint today does not look so bad with the Memorial Day holiday, the traditional start of the U.S. driving season, just around the corner.
Indeed, looking forward, the supply situation may continue to improve. Refinery capacity utilization reached 88.3 percent last week, the highest reading since September.
That alone suggests gasoline production should rise. Indeed, runs on the Gulf Coast broke through the 90 percent level last week. And that is before the big expansion of Motiva’s Port Arthur, Texas refinery comes online later this summer.
Indeed, the supply response should be the decisive factor in the gasoline market this year given demand weakness.
Even the most bullish of commentators can only point to a moderation in the decline of U.S. gasoline demand as an improving factor in the market.
This is similar to saying “the cancer is growing more slowly.” It’s better news than before but hardly a reason to celebrate.
Moreover the supply picture seems to suggest that export demand is not emerging as a game-changer in the gasoline market. The stability of Gulf Coast gasoline stocks implies that regional refiners there are coping well with demand.
Contrast that with diesel, where Gulf Coast stocks have fallen hard this year to multi-year lows.
(Although that trend too may be easing. Gulf Coast distillate stocks rose 900,000 barrels last week, though remain in a deep deficit compared to a year ago.)
This year’s gasoline market shows some of the limitations of trading based on weekly data releases.
Extrapolating future trends from a single-point snapshot of the supply situation is extremely dangerous and tends to ignore the dynamic supply response that can come from unexpected corners of the market.
It also downplays the importance of longer-term planning by oil companies.
For instance refineries have already bought crude oil in anticipation of higher runs this summer. With crude stocks near record levels and the Brent market in backwardation, refiners have little incentive to hold onto stocks.
Refiners have already forecast summer demand, and have laid in crude supplies to meet their term supply commitments to oil product retailers as well as any spot trading requirements they may have.
Indeed rising crude oil stocks in a backwardated market, particularly in the late spring or fall, should probably be best interpreted as a sell signal on oil products.
Barring a severe economic dislocation refiners will run the crude they have bought. If profitability is limited, the drawdown will be slower than planned and will be reflected more in future crude oil buying patterns than immediate gasoline and diesel supplies. (Editing by Alden Bentley)