In its weekly report, the Energy Information Administration (EIA) reported substantial crude oil inventory build. The agency reported that total crude oil stocks for the week ended January 2 increased by 6.7 million barrels from the preceding week, significantly above expectations. Current stocks are 15.1% above the comparable period last year. As such, current stock levels provide for 22.5 days of supply, significantly above the year-earlier level of 18.4 days.



The above chart from the EIA clearly shows that currently inventory levels are above the five-year range (the shaded portion). At the critical Cushing, Oklahoma, delivery point -- the official delivery point for the NYMEX futures contract -- crude oil stocks are more than 80% above the year-earlier level, an all-time high.

For refined products, total gasoline stocks jumped by a greater than expected 3.3 million barrels from the previous week. Current gasoline stocks, though below the year-earlier level, provide for a higher supply cover compared to this time last year (23.4 vs. 22.8).

Today's extremely bearish report brings into sharp focus the fact that oil supplies remain out of sync with a very depressed demand environment. This flies in the face of recent optimism that had pushed the commodity higher in recent days.

While the supply overhang remains a critical near-term headwind, we believe that oil prices have more upside potential than downside risk from current levels. In the energy space, we would prefer to stay with large-cap integrateds, such as Exxon (XOM), Chevron (CVX) and ConocoPhillips (COP). We continue to believe that these names not only have defensive attributes in the current turbulent market, but also provide for plenty of upside potential from current depressed levels.