A likely combination of less refinery demand and more imports may have further bloated U.S. crude oil inventories in the latest reporting week ended last Friday, which could reinvigorate the bearish pressure that has seen crude futures fall 30% since the beginning of the year.

Prompt New York Mercantile Exchange (NYMEX) crude oil futures bounced last week after hitting a 13-year low of $26.19 per barrel (/b) on January 20, rebounding to close above $32/b Friday.

Traders last week seemed to disregard a 4 million-barrel build to U.S. Energy Information Administration (EIA) data for the week ended January 15. Instead, a mini-rally was sparked by headlines suggesting more central bank stimulus measures could be forthcoming in Europe and Japan. Over-extended short positions likely triggered a bout of covering, providing further upward momentum.

Analysts surveyed Monday by Platts are looking for crude stocks to have increased 3.5 million barrels last week. Not only has U.S. production been resilient, but ongoing seasonal maintenance has begun denting refinery demand.

U.S. refinery utilization, which has been moving lower since late December, was expected to fall 0.7 percentage points to 89.9% of operable capacity, according to analysts polled. The last time refiners operated below 90% of capacity was early November.

Even though U.S. refinery demand has been slowing, the amount of crude imported by U.S. refiners could be rising as current market conditions lure barrels from Europe.

Rare arbitrages out of the North Sea to the U.S. emerged last week, making it economic to bring over Ekofisk, Oseberg and Troll crude oils, along with the more niche Heidrun and Harding oils.

Refining margins favor bringing North Sea and West African crude to the Atlantic Coast. The Ekofisk cracking margin on the U.S. Atlantic Coast (USAC) has averaged $5.67/b so far in January, while margins for Nigerian Bonny Light and Brass River have averaged at $6-$8/b.

However, on a delivered-cost basis, Ekofisk has held a $1/b discount to Bonny Light since the beginning of the month, Platts data shows. But all three grades deliver to the region at steep discounts to North Dakota Bakken.

After factoring in a $12/b rail cost to the Bakken netback, margins over the same period are negative, averaging minus $1.17/b.

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Margins on the U.S. Gulf Coast (USGC) are also starting to favor imports. The region is expected to receive its first cargo in several years of Russian Urals, amid the relatively stronger U.S. market and cheap freight in Europe.

Urals coking margins on the USGC have averaged $8.36/b since the beginning of January. While that's not quite as strong as margins for either Mars or Mexican Maya, they are superior to Urals cracking margins in its home markets in Europe.

Urals cracking margins in Northwest Europe (NWE) have averaged just $5.64/b. Margins in Italy have been worse, averaging just $1.94/b.

Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

A wide contango could also be luring barrels to the United States. The NYMEX crude front-month/second-month spread has averaged minus $1.16/b so far in January, compared to minus 42 cents/b for Intercontinental Exchange (ICE) Brent.

At 64.20 million barrels the week ending January 15, crude stocks at Cushing, Oklahoma - delivery point for NYMEX crude oil futures - are nearing adjusted working capacity of 74.36 million barrels, according to the most recent EIA data. More capacity exists on the USGC, where stocks at 241.8 million barrels were at 68% of capacity.

U.S. DISTILLATE, GASOLINE STOCKS
A blast of cold weather on both sides of the Atlantic last week could have helped boost heating fuel demand, which has mostly been lagging this winter due to above average temperatures.

A slowdown in refinery utilization should also help ease refined product inventories.

Analysts surveyed by Platts were looking for a 2 million-barrel decline last week. The EIA five-year (2011-15) average shows distillate stocks declining on average 2.7 million barrels the same reporting period.

A winter storm that swept up the Atlantic Coast caused a power outage this past weekend at PBF Energy's Delaware City refinery, a disruption that might impact EIA's inventory report released next week.

At the same time, the storm may have caused gasoline demand to fall, as drivers stayed off the roads. Gasoline stocks are expected to have risen by 1 million barrels last week.

Gasoline inventories typically decline 500,000 barrels at this time of year, according to the EIA five-year average.
Source: Platts