“Creativity comes from looking for the unexpected and stepping outside your own experience.”
The markets are back in a bit of a short term corrective mode as the US dollar is moving higher pushing oil prices and most other major commodity prices lower in mid-week trading. All of the major financial and commodity markets…including the oil complex continue to be primarily driven by the macro economic data and the perception of what the ongoing recovery will look like down the road. As previously discussed in the newsletter, the markets look at the developed world and see very slow growth at best and in some OECD countries, like Greece for example, still see negative growth. On the other hand they look at the developing world economies and see very robust growth but bordering on the fringes of inflation in many of the countries like China. In the developed world some countries are still providing economic stimulus like the US in the form of QE2 and a likely extension of the existing tax cuts while countries with robust growth are already raising interest rates in their effort to fight inflation… Sweden raised rates today as an example. China is likely to raise rates in the near future as its inflation gauge is well above the governments’ self imposed inflation threshold. In fact in a survey released today the Chinese consumer now views the risk of inflation at the highest level since the late 1990’s putting further pressure on the Chinese government to aggressively address the issue in the short to medium term.
So what does this all mean for the price of oil and other commodities going forward? The current view and resultant market sentiment for oil remains cloudy and uncertain and continues to be driven by mixed signals insofar as demand growth and the destocking pattern of global inventories. Oil inventories around the world have declined over the last several months but will the destocking continue as the developed world economies only recover very slowly and the emerging market world growth will slow down intentionally as governments fight the prospects of inflation? In spite of the plethora of forecasts calling for triple digit oil prices in 2011, I believe it is going to be difficult for oil to remain above the $100/bbl level for an extended period of time until it is clear that the majority of the economies around the world are actually growing at more normal rates than seen today or what may be expected after government tightening in certain countries like China for example.
Yesterday the US Fed FOMC met for the last time this year and ended the meeting as expected with a continuation of moving forward with its current quantitative easing program (QE2) of buying about $600 billion dollars worth of bonds and keeping short term interest rates near the zero level with for an extended period of time. This evolving strategy will continue to pressure the value of the US dollar versus most other currencies and should be medium term supportive for oil prices as well as the broader commodity complex going forward.
Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report for the third week in a row. The API showed only a modest decline in crude oil stocks and builds in both gasoline and distillate fuel inventories. The API reported a crude oil inventory draw of about 1.4 million barrels as refinery utilization rates remained unchanged at 81.6% of capacity They also showed a strong build in gasoline stocks of about 2.4 million barrels while distillate fuel stocks also increased strongly by about 2.0 million barrels during a period of time when the weather in the main heating oil consuming part of the US was the coldest of the season so far. The results of the API report are summarized in the following table. So far the reaction to the API report has been bearish as prices have continued to decline in overnight trading. In fact if today’s EIA report is in sync with the API report, it is likely to result in a strong round of profit taking selling especially if the US dollar remains in positive territory.
My projections for this week’s EIA inventory reports are summarized in the following table. I am expecting a mixed report for US oil stocks. I am expecting a modest decline of about 2.5 million barrels of crude oil inventories based on a modest increase in refinery utilization rates of about 0.3% as refineries continue to return from fall maintenance. If the actual numbers are in sync with my projections the year over year surplus of crude oil would narrow a bit to 21 million barrels while the overhang for the five year average for the same week will also narrow to 31.9 million barrels. The overhang is slowly dissipating in the US as the direction of stock levels remains supportive for prices.
With runs expected to increase by 0.3% and with imports slowing I am expecting a modest increase in gasoline stocks. Gasoline stocks are expected to build by about 0.5 million barrels even as refiners continue to wind down from the higher demand summer driving season and turn their attention to the upcoming winter heating season. This week the gasoline year-over-year deficit is projected to narrow to around the 2.8 million barrel level while the surplus versus the five-year average for the same week will widen to about 8.3 million barrels. Gasoline inventories have staged a decent recovery (recovery defined as destocking) as the overwhelming surplus situation that persisted throughout the entire summer driving season has virtually been eliminated with the overhang versus the five-year average very manageable at this point in time. However, over the last few weeks gasoline stocks have once again began to build suggesting that the overhang may linger longer than expected.
Distillate fuel likely drew by about 1.1 million barrels as economy sensitive diesel fuel implied demand continues to remain steady and as the start of the winter heating season finally gets underway. The latest 6 to 10 day and 8 to 14 day NOAA temperature reports are still showing a large portion of the eastern half of the US likely to be engulfed in colder than normal temperatures for the rest of December. The current forecasts are colder than what was projected about three weeks or so ago and this has given the heating oil bulls a bit of support. With the temperature forecasts projected to be colder than normal we could very well see HO net withdrawals starting to accelerate in the not too distant future. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 5.3 million barrels below last year while the overhang versus the five-year average will widen to 22.3 million barrels.
As usual do not overreact to the API data as the EIA data will be available in a few hours. If the EIA report is within the projection I would expect the market to view the results as neutral as total commercial stocks of crude oil and refined products combined are likely to have decreased for yet another week. However, if the EIA report follows the API data this morning’s report will be viewed very bearishly as it would suggest that the destocking of inventories seen over the last month or so could be coming to an end.
My individual market views are detailed in the table at the beginning of the newsletter. I am maintaining my cautiously bullish view for oil but with a big caution flag as the market is not only being influenced by the macro economic data of late but we are now in the end of the year book squaring mode that could result in additional profit taking selling in the complex as well as a high level of volatility as liquidity begins to decline heading into next week’s trading.
Today I have downgraded my Nat Gas view back to neutral as I believe the market will remain within the existing trading range for the near term or unless the next phase of winter weather turns out to be much colder than normal. Weather drove prices to the upper end of the range and weather is the main driver pushing prices toward the lower end of the trading range as the current eight to fourteen day weather forecast is projecting a moderation in the bitter cold weather seen over the last week or so. In fact the latest NOAA forecast is showing a significantly smaller area of even colder than normal temperatures in the 8 to 14 day forecast than just a week or so ago.
Currently most risk asset classes are in negative territory as shown in the EMI Price Board table below.
Dominick A. Chirichella
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