Energies brace for EIA inventories data

This uncertainly has been reflected in the global equity markets which remain in negative territory for the year to date as shown in the EMI Global Equity Index table below. However, the Index narrowed its year to date loss to 5.5% while the week to date is currently lower by just 0.2%. After the US markets held their own on Tuesday, the Asian markets staged a decent short covering rally on the back of the positive manufacturing data coming out of China (see above). In spite of the underperformance of the manufacturing sector in Europe in August the equity market rally has continued into Europe and at the moment has spread to equity futures markets in the US suggesting a stronger opening on Wall Street this morning. With money moving back into equities, the US dollar is on the defensive so far this morning. For the moment, both equities and the weaker US dollar are supportive for oil prices even though oil fundamentals are not likely to see much of an improvement when the EIA releases their latest inventory snapshot later this morning.

Today the EIA will release their latest snapshot of oil stocks. Late yesterday afternoon the API released yet another surprise set of numbers as summarized in the following table along with my projections and a comparison to last year and the five year average for the same week assuming the EIA data is in sync with the projections. As usual I must caution to not get too excited about the API data which was very bearish for crude oil but bullish for both gasoline and distillate fuel. As I have discussed many times in this newsletter the API data should be used for nothing other than just another projection for the EIA data and not a set a numbers that anyone should invest any trading capital in.

That said, the API reported a huge build of 4.8 million barrels of crude oil stocks even though they reported a big decrease in crude oil imports and a reduction in refinery utilization rates of 0.2%...basically an illogical outcome (once again). A decrease in imports results in less supply while a reduction in refinery runs results in less demand for crude (but run rates were only marginally lower) and thus the API data should not have shown such a large build in stocks. On the other side of the barrel, the API data was a bit more logical since both gasoline and distillate fuel stocks declined on the week as refinery utilization rates declined. Likely implied demand increased and coupled with loss of production from a decline in utilization rates contributed to the surprise decline in refined products inventories. We will have to watch the EIA data closely, especially insofar as demand is concerned. With the US economy in the slow and grow mode, all eyes will be focused on how the slowing is impacting oil demand.

My projections for this week’s inventory report are summarized in the following table along with a comparison to last year as well as the five year average for the same week. I am expecting another week of across the board inventory builds in the oil complex with crude oil stocks expected to grow by about 1.2 million barrels. After declining for a few weeks I am expecting imports to continue to increase and offset the minor increase I am projecting for refinery utilization rates of 0.1%. If the EIA data is in sync with the projections, the year over year surplus will widen to 16.1 million barrels while the overhang versus the five year average for the same week will come in at 33.7 million barrels.

With runs expected to hold steady and demand slowly waning, I am expecting modest builds in both gasoline and distillate fuel. Gasoline stocks are expected to grow by about 200,000 barrels as wholesalers begin to move gasoline into secondary inventories in preparation for the long holiday weekend in the US this week. However, the year over year overhang will still be around 20.7 million barrels while the surplus versus the five year average for the same week will be at 27.5 million barrels. As I have discussed in previous newsletters, not only is the industry plagued with a huge surplus of gasoline in inventory but all signs point to the summer driving season ending with inventories above where they started the season at the end of May. Distillate fuel likely built another 1 million barrels as economy sensitive diesel fuel implied demand continues to decrease and follow the slowly developing downtrend that has been in place since about May of this year or around the same time the US economy began to slow down. Overall, I would categorize this week’s inventory report as bearish if the actual numbers are in sync with the projections.

The tropical weather situation still continue to be a non-event insofar as oil production and prices are concerned in the short term. Both Hurricane Earl and Tropical Storm Fiona are both clearly heading into the north Atlantic with absolutely no chance of moving into the Gulf of Mexico or impacting energy supplies. As mentioned yesterday there is another weather wave that that is sitting in the eastern Atlantic that has been upgraded overnight to a 50% weather event that is categorized as a high probability event of strengthening into a tropical cyclone over the next 48 hours. This weather pattern is starting out the same as Danielle, Earl and Fiona and thus has the potential to developing into something of concern. However, based on the outcome of just about everything in the tropics this year it can only fall into the category as an event to watch its evolution closely but not yet spending any trading capital on it.

In fact the tropical weather season continues to be a bust insofar as oil and Nat Gas production in the Gulf of Mexico is concerned. Neither the oil or the Nat Gas markets are incorporating any risk premium into the price associated with any of the storms out there or those that are still in the potential category. The market will not react to a tropical storm until it is clear that it is a hurricane and it is in fact heading to the sweet spot for oil and Nat Gas production in the Gulf. For now the tropical events fall into the category of being of interest and something to monitor...nothing more, nothing less at this point in time.

My individual market views are detailed in the table at the beginning of the newsletter and remain the same for today. Today’s trading activity in the oil pits will be all about the direction of the financials coupled with the outcome of the EIA oil inventory report at 10:30 am EST. Once again today there will be more key economic data hitting the media airwaves during the US trading hours. The markets will get updates on construction spending, auto & truck sales and ADP’s estimate of private sector jobs in August. Any of this data can impact the markets and even offset some of the bullish tone that has been in the global equity markets since the release of improved manufacturing data out of China overnight.

Volatility and wide trading ranges are expected to continue for the rest of the week as liquidity will remain on the low side. Currently, most risk assets are in positive territory as cash is flowing out of the US dollar and Treasuries at the moment.

Best Regards

Dominick A. Chirichella

dchirichella@mailaec.com

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