I'm not buying into this crude rally. While the March selloff did cause a fair amount of speculative long liquidation, the specs are still holding a large long position. Moreover, record high crude oil inventories coupled with still-soft demand do not present a bullish picture.
After building a net long position of 421,000 contracts in WTI thru Feb. 21, speculators spent the next five weeks liquidating 200,000 contracts of that position. They remained net long 222,000 contracts as of last Tuesday, March 28, according to the CFTC. Producers and swap dealers (Wall Street firms) are net short, by a lot.
While the speculative liquidation was impressive, they're still long, and on what basis? On the basis of a record 534 million-barrel inventory of crude? Last week they went crazy buying because inventories "only" increased another million barrels when they were expecting an increase on the order of 3 million. Whoopee.
Of course, supplies are only one side of the equation. The other side is demand. Let's look at that.
Refiner inputs, a very important factor in crude demand because it represents the crude the refiners consume to make their products, have risen in the past two weeks. That's true. Inputs now stand at 16.2 million barrels per day, or the highest level in 10 weeks. However, the problem is that's down vs. last year. Refiners are consuming less crude than they were last year, but meanwhile we have about 6% higher inventories.
Next, imports. Imports fell by about 1.0% last week to 8.2 million barrels per day. That figure is about 0.7% higher than same time last year, which basically means they're flat year over year. Compare that to where they were on Feb. 3 when they were running 32% higher than the previous year. That's just two months ago. So, demand for imports has collapsed.
What about products? It's true that gasoline and distillates have seen some impressive drawdowns of late. In the last six weeks, gasoline inventories have come down nearly 20 million barrels to 239.7 million barrels. That's the lowest level of inventories since Dec. 30. However, even with that big decline, inventories are only marginally below last year, about 1.2%. At the same time, though, gasoline demand, which picked up recently, is still below last year. Gasoline production, while having come up recently as well, is still down vs. last year too, so that's not an indication of strength.
Distillates have seen some significant inventory reductions and stocks are now 5.5% below last year. Demand is also strong. Distillate demand is running 13% above last year. This is really the only refined product where we can make a good bull case. Contrast that with residual fuel, propane, other oils, etc., and they're are all down versus last year.
I add it all up and I see weak gasoline demand, weak refiner inputs, weak imports, weak gasoline production, weak refined product demand except for distillates and record-breaking crude oil inventories with rig counts rising weekly, Iraqi production rising, Kuwaiti production rising, OPEC undecided on an output cut extension and a huge speculative long position still embedded in this market. You wanna buy that? I don't. I think crude is going lower.