Weekly energy inventory report preview for Jan. 20

Quote of the Day

“Do not go where the path may lead, go instead where there is no path and leave a trail.”

Ralph Waldo Emerson

Tuesday was a strong day for most asset classes with oil prices gaining well over 1% on the day. Equities were the main financial feature of the day while the dollar was mixed. Nothing has changed in the overall sentiment as I still view most asset classes as being in the midst of a downside corrective move (the U.S. dollar an upside corrective move) as the reality that the economic recovery is slow at best. In addition China continues to signal that it is now mostly focused on a less accommodative monetary policy. Overnight China said some lenders were asked to restrict credit because they failed to meet regulatory requirements. According to a banking regulator quoted in Bloomberg this morning China will restrict credit growth in the country to about $1.1 trillion dollars (7.5 trillion yuan). On Thursday another series of economic data for the Chinese economy will be released and closely watched by the market.

The additional intervention by the Chinese government today to cool the economy has permeated throughout the financial and commodity markets overnight. The EMI Global Equity Index (table shown below) although still positive on the week has lost some of its gains from yesterday. China and Hong Kong still remain the only two bourses in the Index that are still in negative territory for the year to date. As much as that is a surprise the U.S. Dow Jones Index is now the number one bourse in the Index showing a year to date gain of 2.9%. So far corporate earnings have been mixed in the United States this week with many more companies reporting over the next few days. In total about 12% of the companies in the S&P 500 Index will report this week. As mentioned yesterday any one or a combination of corporate earnings could result in a major directional move on the market. Yesterday oil prices were mostly supported by a strong move in U.S. equities in anticipation of a Republican Senatorial win in Massachusetts, which turned out to be the result.

Today the U.S. dollar now seems to be the main catalyst impacting oil prices as well as the broader commodity markets. The dollar is stronger versus most major currencies (except the Yen) on concern that the moves by the Chinese government may slow the entire global economic recovery and thus reduce demand for most commodities. In addition if this scenario plays out the flow of funds into riskier asset classes will slow significantly and move back into safe haven currencies like the dollar. The dollar (versus the euro) has been mostly a macro firming pattern since the end of November of 2009. From a short term technical perspective it has broken out of the sideways trading range it has been in for most of this year and now may have a clear technical path to levels not seen since the end of August of 2009. A firming dollar is negative for oil and other commodity prices.

Late this afternoon the API will release their snapshot of oil inventories while the EIA will release their more widely followed report tomorrow morning. My projections for this week’s round of fundamental snapshots are shown in the following table along with a comparison to last year and the five-year average for the same week assuming the actual data is in sync with the projections. I am expecting an across the board build in oil inventories along with a modest decline in refineries utilization rates. Most of the expectations I have seen floating around the media are also showing across the board builds. If the actual data is in line with the projections I would categorize this week’s report as biased to the bearish side.

I am expecting a build of about 1.5 million barrels of crude oil this week bringing the level in line with the same week last year (a week that was already oversupplied) but still almost 21 million barrels above the five-year average for the same week. Some of the other projections are showing crude oil inventories could build by as much as 2.5 to 3 million barrels on the week.

I expect refined products to build modestly on a combination of slow demand growth and a spell of warmer than normal weather engulfing a major portion of the United States. Gasoline stocks likely built about 750,000 barrels as demand for gasoline is normally at the lower end of normal for this time of the year coupled with the fact that gasoline is in its normal seasonal building period. If the actual data is in sync with the projection the year over year surplus will be around 4.3 million barrels while the more important overhang versus the five-year average for the same week will be at 6.1 million barrels. Some of the other projections are calling for a build of over 2 million barrels of gasoline.

With above normal temperatures over most of the eastern half of the United States (and expected to remain until the end of January) I am expecting a build in distillate stocks this week of about 500,000 barrels. Economy sensitive diesel fuel stocks have been growing over the last several weeks (diesel fuel demand is not picking up much so far) and without a cold weather pull on heating oil stocks the total distillate pool likely increased this week. I am projecting the surplus versus last year to be around 16 million barrels while the overhang versus the five-year average for the same week should be around 25.6 million barrels.

Until at least early February there are not very many pockets of colder than normal temperatures forecast for the US. In fact in the regions of the country that consume the majority of the heating oil and Nat Gas the projections are showing normal to above normal temperatures through Feb 2 (as far as the daily NWS forecast goes). Although Nat GAS inventories declined strongly last week and are expected to show another strong decline in this week’s report of over 200 BCF the fact that the weather is mild (by winter standards) and expected to stay mild the forward movement of product out of inventory is likely to slow over the next several weeks and as such the enthusiasm to push Nat Gas prices beyond the upper end of its trading range is minimal at this point in time. In fact any disappointment in tomorrow’s Nat Gas stock report could lead to a strong sell-off and push prices closer to the lower end of its trading range.

My individual market views remain the same and are shown in the table at the beginning of the newsletter. Continue to expect a high level of volatility over the next few days as well as sudden event driven market direction changes as occurred yesterday.

Currently prices are lower across the board except (see EMI Price Board table below) for the U.S. dollar which is continuing to firm after a technical breakout to the upside versus the euro.

Best regards

Dominick A. Chirichella

dchirichella@mailaec.com

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