With crude oil prices rallying yesterday to over $77 a barrel, today's DOE report likely will play a big role in either stopping the rally or aiding oil prices higher. For the week ending January 29, refiners utilized just 77.7% of their capacity- showing how dismal demand and profitability has become. While these numbers may reflect a poor showing, oil traders and firms will likely ignore the fact. Hopefully they can reattach their heads quite soon. We've not seen utilization that low since the 80's. (excluding Hurricane related shutdowns in the last decade)

The bigger picture today is overall demand. Gasoline inventories fell 2.3 million barrels, but largely in part that refiners are beginning to slow production of high RVP winter fuels in areas of the country- think of it basically as a clearance sale of winter gasoline. The refiners don't want to produce too much of the product because when summer rolls around, it can't be used. Basically, we'll seeing this winter fuel sell down and it will continue until inventories gradually empty out.

Looking at distillate inventories, we saw a modest decline of one million barrels. The continued draw is helping refiners, who have been hurting from a large decline in demand for distillate fuels. Demand for distillates is down 9% from just a year ago, when it was already low because of the economic slowdown. This may be a small concern as the CPC is predicting colder than average temperatures for the area of the country that consumes the most heating fuel. This small concern may be blown out of proportion and cause prices to rise for most oil products.

Overall, oil inventories stand 6% lower than a year ago, while gasoline inventories stand 5% higher and distillates inventories have seen a 9% build since last year. Demand for gaosline is down half a percent to a lousy 8.6 million barrels per day- a pretty low number. Demand will likely bottom out quite soon and begin to rise as the U.S. and Canada move towards warmer months.

Overall, this DOE report really doesn't show any long term concerns, and oil prices should remain where they are- however, many traders, as we all know, are disconnected between fundamentals and speculation. I have a feeling we'll see oil prices continue to climb, even though I don't believe there to be a credible reason they should.

Retail gasoline prices will rise across the United States and Canada into the weekend, with prices gaining 2-4cts/gal on average in the U.S. and rising 1-3c/L in Canada.