We got the oil inventory report a short while ago from the Energy Information Administration and saw another 1.055-million-barrel build in crude in the latest week. That was the third week in a row that inventories climbed, making a total of 4.1 million barrels over the past three weeks. Despite this, we are still down about 20 million barrels from the high of 543 million barrels seen on April 29. Inventories are high, but they have stopped climbing. That is important to remember.
Gasoline experienced its second weekly drawdown, this time 2.8 million barrels adding to the 3.3-million-barrel draw we got last week. That makes more than 6 million barrels of gasoline inventory drawn over the last two weeks, bringing inventories to the lowest level since Jan. 1.
Distillates also experienced a draw of nearly 2 million barrels, erasing the 1.2-million-barrel build last week. Over the past four weeks, we have seen a drawdown of 1.8 million barrels of distillate. Normally, this is the time of year when we start to see some inventory building as refiners build supply of heating oil for winter demand. However, we really haven't seen any inventory building at all. From June 1 through the current report, there has actually been a net drawdown of 181,000 barrels. Contrast that with last year where, over the same period, we got a build of 14 million barrels, and in 2014, about 3.5 million from June to August.
This is not to say we won't see distillate inventories rising again, but we need to have some perspective because it only seems as if traders want to point to supply and sell. That's what they are doing today.
To get a sense of demand, I like to look at net crude oil imports to the U.S. In the week ending July 29, net crude oil imports hit 8.1 million barrels per day. That was the highest net import total since April 2014. In today's report, net crude oil imports eased to 7.7 million barrels per day, but that is still 30% higher than the low of 6.1 million barrels per day in April 2015.
Today's small drop in crude imports in the data means nothing. The overall trend is clear: Imports and demand are rising. Moreover, the draws in gasoline and inventories are constructive.
From a technical and sentiment standpoint, if you look at the Commodity Futures Trading Commission's Commitment of Traders report, managed money is net long, but net long by the smallest margin since last February. That was when crude bottomed and proceeded to rally nearly 80% over the next three months.
Some might say the fact that oil speculators are net long at all is bearish; however, it's important to realize that managed money being net long is normal because it reflects the explosion in the popularity and use of index funds and ETFs that are linked to crude. These are passive, long-only investors, so when their net-long position becomes really small, it's pretty much the same as them being short or out of the market. That's a good contrarian signal.
The bottom line is, I think today's selling in crude is an overreaction. Despite the small build in crude, the fundamentals are looking better than where they were in late May. Only the smart money was selling up there. (And I did call a top at that time.)
These developments in the past three weeks do not appear to be additionally bearish. I'd be buying oil on this dip.