“To talk without thinking is to shoot without aiming”
As I have been warning, the downside correction in oil prices, as well as the broader commodity complex, began with a bang on Tuesday resulting in oil prices falling about 2.5% with even larger losses in metals and agricultural commodities. The market sentiment quickly changed to profit-taking mode as a massive downside correction hit most all commodity markets (exception being Nat Gas which is still being supported by cold weather). I do not think the commodity rally is over yet as I believe we are just in the midst of a normal correction within a longer term uptrend. That said the decline in commodity prices has resulted in a cloud over equities as well as the Nat Gas market.
The selling in oil and several other commodities has continued overnight with oil prices down over 1% as of this writing. With so many investor/traders and analysts bullish and predicting oil had no place to go but over $100/bbl, it should be no surprise that money has moved to the sidelines as the market has been overbought and prices were way ahead of what the improving fundamentals are suggesting. The fact that the U.S. dollar traded in positive territory throughout yesterday's trading session and into this morning so far along with a languishing equity market did not help to support oil and other commodity prices over the last 24 hours. The oil markets are now clearly in the correction we predicted and will likely remain in corrective mode for at least a few more days (or longer if today's oil fundamentals snapshot is the least bit bearish). In addition, if the rest of the macroeconomic data due out this week disappoints the market in any way further, then moves to the downside can be expected in equities resulting in even less support for the commodity complex.
Global equity markets have also been languishing over the last 24 hours with the EMI Global Equity Index holding steady (so far) maintaining the year to date gain at 1.4%. However, most of the bourses have moved into negative territory since yesterday's U.S. close and values are likely to move lower as the U.S. markets open this morning. U.S. equity futures are also in negative territory pointing to a lower opening on Wall Street. With the U.S. dollar gaining ground and equities showing signs that they also may be setting up for a downside correction, there is little external support for oil or the boarder commodity complex in the very short term. For the next 24 hours, oil prices will likely be driven by the outcome of this morning's EIA report. Longer term oil and the broader commodity complex are likely to remain in a long term uptrend.
Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report that showed a large decline in crude oil stocks along with larger than expected builds in both gasoline and distillate fuel inventories. The API reported a crude oil inventory draw of about 7.5 million barrels even as refinery utilization rates declined by 0.2% to 85.4% of capacity They also showed a strong build in gasoline stocks of about 5.6 million barrels while distillate fuel stocks grew by about 2.2 million barrels as the weather last week in the main heating oil consuming part of the U.S. experienced a bit of a thawing out. 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 could result in another strong push to the downside, especially if the U.S. dollar remains in positive territory as it is as of this writing.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report for U.S. oil stocks. I am expecting a modest decline of about 1.2 million barrels of crude oil inventories as refiners continued to manage their yearend inventory levels. If the actual numbers are in sync with my projections, the year-over-year surplus of crude oil would narrow to 10.9 million barrels while the overhang of the five-year average for the same week will also narrow to 24.4 million barrels. The overhang is slowly dissipating in the United States as the direction of stock levels remains supportive for prices.
With runs expected to increase by about 0.3% and with imports expected to increase a bit, I am expecting a modest increase in gasoline stocks. Gasoline stocks are expected to build by about 0.8 million barrels even as refiners continue to focus their attention to the colder than normal winter heating season that has been in play so far. This week the gasoline year over year deficit is projected to widen to around just 4.1 million barrels while the surplus versus the five-year average for the same week will narrow to about 2.4 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 and the sudden fundamental surge in prices discussed above may dissipate sooner than later.
Distillate fuel likely built by about 0.3 million barrels as economy sensitive diesel fuel implied demand continues to remain steady and as last week's winter heating season experienced a bit of a warming spell. However, the latest six to 10 day and eight to 14 day NOAA temperature reports are still showing a large portion of the United States likely to be engulfed in colder than normal temperatures for the first half of January. With the temperature forecasts projected to be colder than normal for the next few weeks, 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 2.2 million barrels above last year while the overhang versus the five-year average will be around 20.9 million barrels.
As usual, do not overreact to the API data as the EIA report is due out in a few hours and be cognizant that the API report is often not in line with the more widely followed EIA data. If the EIA report is within the projection, I would expect the market to view the results as mostly neutral as total commercial stocks of crude oil and refined products combined are likely to have decreased marginally for yet another week. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets and how much the macro issues will offset any of the individual micro drivers like supply & demand.
My individual market views are detailed in the table at the beginning of the newsletter. I have downgraded my overall view to neutral as the correction could be deeper than originally thought. However, I am maintaining my bias as cautiously bullish with a lot of emphasis on the word cautious as the correction may not yet be over. With the plethora of macroeconomic data due out this week along with this morning’s EIA inventory report, additional moves to the downside could occur at anytime if the data is less optimistic than the current market sentiment. That said, we are clearly in an technical and fundamentally driven longer term uptrend and any significant correction could turn out to be a good entry point as oil prices seem more destined to at least make an attempt at approaching – if not hitting – the $100/bbl mark. That said WTI is approaching another key technical support level of around $88/bbl. I would not enter the market from the long side if this level is breached today and/or if today's EIA fundamental snapshot is bearish.
I am maintaining my Nat Gas view as neutral with a cautiously bullish bias as the next phase of winter weather seems to now be ready to turn colder once again (at least for the first half of January basis the latest NOAA forecasts). However, with supply and demand balances still very robust, even a return to colder than normal winter weather conditions will not be enough to send prices into surge mode, rather we can expect to see prices move toward the high end of the trading range and possibly even breach it. Weather is still the sole contributor to price direction.
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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