Oil inventories steady despite pipeline leak

Quote of the Day

“Wisdom is knowing when to speak your mind and when to mind your speech.”

Evangel

The Enbridge pipeline leak continued to dominate the oil complex throughout Monday along with another positive day for equities and a declining US dollar. As shown in the following continuation chart of the spot Nymex WTI crude oil contract prices have broken out of the consolidation pattern to the upside as a result of the Enbridge pipeline shutdown. Prices were in a narrow trading range or consolidation pattern for about 10 days prior to the breakout. If the pipeline remains shut down, prices will test the psychological resistance level of $80/bbl and then the more challenging technical resistance level of $82.60/bbl as shown on the chart. The market is running on emotions and not paying very close attention to the fact that oil supply is robust and more than adequate to compensate for the loss of imported oil via the pipeline for an extended period of time. Prices will remain firm until it becomes known when the line will be restarted. As I will discuss below, the market will likely gain additional support from this week’s inventory report which is expected to show a sizeable draw mostly related to the loss of crude oil from the pipeline. However, inventories outside the US are a bit more in balance and, as Goldman predicted yesterday, they expect inventories to continue to decline and are expecting price to eventually breakout of the upper technical range resistance level and trade in a new trading range of $85/bbl to $95/bbl before the end of the year. I would view Goldman’s bullish prediction with a bit of caution as they have predicted a bullish move several times this year that did not materialize.

Today the oil inventory cycle will get underway when the API releases their weekly report after the oil market closes while the EIA data is expected to be released at its regular time on Wednesday morning. 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 a mixed report with draws in both crude oil and gasoline and a modest build in distillate fuel. If the actuals are in sync with my projections for a crude oil draw of 2.5 million barrels it will be the second week in a row of declines. It would be a bullish outcome for the week but the year over year surplus will still be at 24.6 million barrels while the overhang versus the five year average for the same week will be at 42.1 million barrels.

Global equity markets have been on a tear over the last two weeks as shown in the EMI Global Equity Index table below. The Index has gained 1.4% already this week narrowing the year to date loss to just 1.4%. The last time the Index was in positive territory was at the end of April. Four of the ten bourses are in positive territory for the year to date with Germany still sitting on top of the leader board. China and Japan remain the only bourses still showing double digit year to date losses. However, China’s Shanghai A shares are currently off of their worst levels of the year and are not in bear market territory showing a loss of 18% versus well over 20% for most of 2010.

Stocks firmed in Asia overnight following the lead of US and positive economic data coming out of China this week. On the European front, equities are currently on the defensive as the latest investor confidence data out of Germany tumbled more than expected to a nineteen month low. In addition, UK inflation data exceeded the government’s 3% threshold limit for a sixth month. The UK housing market gauge also declined more than expected. In spite of the slowly improving sentiment, the data in the developed world is still suggesting a slow and anemic recovery at best and some of the enthusiasm toward the equity markets may be a bit premature. The selling in Europe has spread to the equity futures market in the US which is currently predicting a lower opening on Wall Street this morning.

The equity market is not supportive for oil prices today nor is the US dollar which has gained marginally overnight adding a bit more negativity to the oil complex as well as most asset classes. My individual market views are detailed in the table at the beginning of the newsletter and remain the same for today. The short term direction of oil prices are going to be impacted by a combination of the direction of the externals as well as the evolving situation with the Enbridge pipeline leak and most importantly when it will be fixed and restarted.

Currently the oil complex is marginally lower to start today’s session as show in the EMI Price Board below.

Best regards

Dominick A. Chirichella

dchirichella@mailaec.com

Energy Market Analysis is published daily by the Energy Management Institute 1324 Lexington Avenue, # 322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.

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