Oil turns bullish on dollar and equity support

Not only did commodities surge yesterday (including gold making yet another new record high) but global equities also surged higher with buying continuing in overnight trading as shown in the EMI Global Equity Index table below. Over the last twenty four hours every bourse in the Index gained ground as shown in the table below. The Index is solidly in positive territory and at the highest level since the first half of April. The Index is higher by 2.5% for the year to date with Canada (a resource/commodity driven economy) still holding the top spot on the leader board. Six of the ten bourses are in the winners column with China’s Shanghai A shares still hovering below the bear market threshold for the year. Most Asian markets gained ground overnight while Europe is also starting the day in positive territory. The main storyline in the financials is still the falling US dollar. The dollar is currently below the last major support level and losing ground on a negative view of the US economic recovery coming from trader/investors as they focus on recent Fed statements. The US dollar has given back most all of its gains from earlier in the year (especially those occurring during the peak of the EU debt crisis) and is currently trading at the same level it was at back in mid-January of this year. Simply put equities and the US dollar remain strongly supportive for oil prices.

EMI Global Equity Index

10/6/10

Change

Change

2010 YTD

2010

From

From

Change

7:04 AM

Yesterday

Yesterday %

%

US/Dow Jones

10,945

193

1.80%

5.0%

Can/S&P-TSX

12,498

175

1.42%

6.4%

Lon/FTSE

5,691

56

0.99%

5.1%

Paris/Cac 40

3,775

43

1.15%

-4.1%

Germany/Dax

6,280

64

1.03%

5.4%

Japan/Nikkei

9,691

173

1.82%

-8.1%

HongKong/HangSeng

22,880

241

1.06%

4.6%

Aussie/SYDI

4,686

80

1.74%

-4.0%

China/Shanghai A

2,782

47

1.72%

-19.1%

Brazil/Bvspa

71,283

898

1.28%

3.9%

EMI Global Equity Index

15,051

197

1.33%

2.5%

Yesterday afternoon the API released a mixed inventory report showing a surprisingly larger than expected crude oil inventory build of 4.4 million barrels along with a surprisingly larger than expected decline in gasoline stocks of 4.1 million barrels while distillate fuel stocks were within the expectation for a draw of around 800,000 barrels. The results of the API report are summarized in the following table along with my projections for this week’s inventory report and a comparison to last year as well as the five year average for the same week. So far, the market has pretty much not reacted to the API report as oil prices are mostly lower across the board. Of interest, the API data also showed builds in both PADD 2 and Cushing suggesting that the current strengthening of the WTI/Brent spread may be coming to an end as refiners cut back utilization rates (API runs declined by 2%). As a precaution, I closed my long WTI/Brent spread last night while I await this morning’s EIA data for more clarity.

Projections

10/6/10

API

Current

Change from

Change from

Results

Projections

Last Year

5 Year

mmbls

vs. Proj.

vs Proj.

Crude Oil

4.4

0.6

21.1

39.8

Gasoline

(4.1)

(0.3)

7.9

21.4

Distillate

(0.8)

(0.8)

1.0

31.8

Ref Change Level

-2.0%

-0.3%

0.5%

2.8%

Utilization %

81.6%

85.5%

85.0%

82.7%

My projections for this week’s inventory report are summarized in the abovetable along with a comparison to last year as well as to the five year average for the same week. I am expecting a mixed report with a minor build in crude oil (as a result of refinery utilization rates declining) and modest draws in both gasoline and distillate fuel. If the actual numbers are in sync with my projections for a crude oil build of 600,000 barrels it would raise a question mark about the early start of a destocking trend in crude oil seen over the last few weeks. However, the declines to date have not had any significant impact on the overhang that has persisted in the US throughout the entire economic recovery so far. As such, I would categorize crude oil as biased to the bearish side as the year over year surplus will still be around 21.1 million barrels while the overhang versus the five year average for the same week will have in fact widened modestly to 39.8 million barrels.

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