Oil prices were mixed this morning after inventory data showed a larger than expected build in oil stocks this week. Inventories of crude oil gained 1.7 million barrels compared to a draw in gasoline stocks of 200,000 barrels.

The larger and more important news was that distillate fuel stocks dropped over a million barrels, compared to the expected build of a million barrels. The news of a large drop in distillate stocks along with a small increase in demand of distillate fuel may signal to traders the end of the economic slowdown, signaling a period of higher oil prices.

Overall demand of petroleum products remains four percent lower while demand for gasoline remains comparable to last year, nudging up half a percent. While distillate demand is still down eight percent, it is up slightly from previous weeks, which may spur a wave of buying.

While oil rises to highs not seen since early in the summer, retail gasoline prices have surged higher as well. The average price for a gallon of self-serve unleaded spiked to $2.598, up from $2.569 yesterday, and nine cents higher than just a week ago. Retail prices will continue to rise as stations race to keep ahead of surging wholesale prices, with prices passing $2.65 in the next week.

Oil prices seemingly remain attached more towards the direction of the Dow and economic news than traditional fundamentals, which may be risky for oil traders betting prices will rise. If there were to be a series of bad economic news, prices could again fall into the $60 range.

Another piece of the puzzle, the hurricane season, has been silent. Through today, there has not been one named storm in the Atlantic, yet the market has seemingly ignored this. Should a tropical storm form, I would be quite concerned that it would cause an unnecessary surge in oil prices.

Here's how we stack up:
Refiners used 84.5% of capacity last week, much lower than last summer.
The Strategic Petroleum Reserve (SPR) has nearly 20 million barrels more than it did a year ago.
Crude stocks are 18.4% higher than a year ago.
Motor gasoline stocks are 2.9% higher than a year ago.
Distillate stocks are 23.7% higher than a year ago.

Patrick DeHaan
Senior Petroleum Analyst