Bear attack

Front-month NYMEX crude peaked at $72.47/barrel last week, but has since fallen below $70/b, settling at $68.97/b on Wednesday. Thursday morning crude was down nearly $3.
This week started on a bearish note, with crude falling $2.33 in one day after Platts reported that Chinese apparent petroleum demand fell 5.4% in August to 33.02 million mt. That was the first monthly fall recorded since March.

Demand appeared to be picking up between March and July, but consumption was not; China's product inventories soared, causing the country to cut refinery throughput and crude imports in August.

Tuesday evening the American Petroleum Institute reported a large gasoline inventory build and a crude inventory build; analysts had been looking for a crude stock draw. The market waited for confirmation from Wednesday's EIA report and got it in the form of a 2.86 million barrel build.

US crude inventories have been generally falling for months, from 375.258 million barrels the week ending May 1 to 335.608 million barrels the week ending September 18. With refinery runs low -- the result of poor product demand -- there was really no reason to boost imports and increase stocks.

A wide contango encouraged some stock-building in the summer, but that contango has since narrowed, which suggests last week's 2.86 million barrel build could have been a one-off event--the result of crude exiting floating storage. The EIA's one-week jump in crude imports backs this up.

US crude inventories are currently 45.42 million barrels above year-ago levels and 32.97 million barrels above the five-year average.

Even if that surplus is chipped away, the bulls will have to contend with low refinery runs and mounting product inventories. Refiners around the world have been cutting back throughputs, shutting plants partially or completely (Valero's Aruba refinery), citing poor refining economics.

But inventories continue to build nonetheless. US distillate stocks at 170.754 million barrels the week ending September 18 were 45.31 million barrels above year-ago levels, while gasoline stocks at 213.109 million barrels were up 34.37 million barrels.

Sill, the bears can't get too comfortable. OPEC likes the $70/b area and will likely move to protect it if prices drop too far. Also, the November NYMEX heating oil crack spread has actually strengthened recently, to $6.23/barrel on Wednesday from $5.05/b on Monday, reflecting some optimism that the distillate inventory building trend will soon reverse.