Crude Above $110 Despite Supply Rise

The U.S. Energy Department's weekly inventory release showed that crude stockpiles logged a surprise increase, as production climbed to its highest level in 24 years. The report further revealed that gasoline and distillate supplies were down from the week-ago levels. Meanwhile, refiners unexpectedly scaled up their utilization rates by 0.2%.

Despite the unsupportive crude data from the U.S. government, the ongoing unrest in Syria that could destabilize the resource-rich Middle East and further tighten the global supply picture, pushed the commodity’s price above $110 a barrel.

About the Weekly Petroleum Status Report
The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

Analysis of the Data
Crude Oil: The federal government’s EIA report revealed that crude inventories climbed 2.99 million barrels for the week ending Aug 23, 2013, following a decrease of 1.43 million barrels in the previous week.

The analysts surveyed by Platts – the energy information arm of McGraw-Hill Financial Inc. (MHFI) – had expected crude stocks to go down some 1 million barrels. A sharp uptick in the level of imports and a spike in domestic production – now at their highest level since 1989 – led to the surprise stockpile build-up with the world's biggest oil consumer.

However, crude inventories at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – were down 837,000 barrels from the previous week’s level to 36.59 million barrels. Stocks are currently at their lowest since Mar last year and 29.5% under the all-time high of 51.86 million barrels reached in Jan.

Despite the weekly inventory increase, at 362.05 million barrels, current crude supplies are down slightly (by 0.7%) from the year-ago period, though it is still close to the upper limit of the average for this time of the year. The crude supply cover was up from 22.7 days in the previous week to 22.9 days. In the year-ago period, the supply cover was 23.5 days.

Gasoline: Supplies of gasoline were down for the third time in as many weeks despite a decline in domestic consumption and rising imports. The fall in gasoline inventories could be attributed to lower production.

The 587,000 barrels withdrawal – below analysts’ projections for a 1.5 million-barrels decrease in supply level – took gasoline stockpiles down to 217.81 million barrels. Notwithstanding this drawdown, the existing inventory level of the most widely used petroleum product is 8.3% higher than the year-earlier level and is in the top half of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) were edged down 316,000 barrels last week, counter to analysts’ expectations for a 1 million barrels rise in inventory level. The decrease in distillate fuel stocks – the first in 4 weeks – could be attributed to strengthening demand, partially offset by higher imports.

At 129.04 million barrels, distillate supplies are 2.3% above the year-ago level but is close to the lower limit of the average range for this time of the year.

Refinery Rates: Refinery utilization edged up 0.2% from the prior week to 91.2%. The analysts were expecting the refinery run rate to decrease 0.5% to 90.5%.

Stocks to Consider
With spot crude price staying strong – at around $110 a barrel – brokerage analysts are likely to upgrade their forecasts on oil-weighted companies and related support plays, leading to positive estimate revisions.

While all crude-focused stocks – including behemoths like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) – stand to benefit from rising commodity prices, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.

In particular, one can look at Matador Resources Co. (MTDR) – a small-cap, undervalued E&P player – as a good buying opportunity. Dallas TX-based Matador Resources, sporting a Zacks Rank #1 (Strong Buy), with current focus on the high-return Eagle Ford shale formation in South Texas, is expected to witness earnings growth of 287% in 2013.

Moreover, a price-to-book (P/B) ratio of just 2.5 suggests that the stock is still undervalued. In fact, shares of Matador Resources have risen from $12.78 to $17.42 since we recommended it on Jul 22.

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