“Few things are harder to put up with than a good example.”
The downside correction continued in the oil complex as well as in the broader commodity complex and in many of the global equity markets on Tuesday but seems to have stalled as of this morning. Uncertainty has once again emerged as a result of the intentional slowing of the emerging market countries as they accelerate their fight against inflation risk along with the reminder that some of the developed world countries could potentially see a double dip after yesterday's bearish fourth quarter GDP report out of the UK. The fact that the Saudi Arabian Oil Minster indicated over the media airwaves that Saudi and the rest of OPEC are likely to put more oil into the market to meet any additional increase in demand left the oil bulls a bit nervous that the short term run to the upside may be over for the moment.
That all said overnight the China Petroleum and Chemical Industry Association indicated that refinery processing may increase by about 7.5% in 2011 reminding the world that the main oil demand growth engine is still a factor in the overall movement of supply, demand and global inventories toward a pre-recession level. China represent about 30% of the world's projected oil demand growth this year. This has resulted in crude oil prices rising a bit overnight after getting pummeled over the last several days. The upside reaction has spurred Brent even higher as more and more oil investor/traders continue to trade the Brent contract (open interest is continuing to rise) over WTI as many now view Brent as a better gauge of the world oil situation. The fact that inventories are hovering near record high levels in both PADD2 and Cushing, OK with even more Canadian crude heading to this area of the US suggests to most participants that the relationship of WTI to the other world's crude oil is very undervalued and not truly representative of the bigger oil supply & demand picture. WTI is now trading at a discount of about $9.65/bbl below Brent or at record low levels with no short term solution to the overhang of crude oil in the US mid-west region.
Back to the externals, the global equity markets added modest gains over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is now higher by 0.4% for the week resulting in the year to date Index level widening to 1.2%. Canada and China remain in the negative column with the Canadian bourse under pressure as a result of the commodity correction to the downside while China's equity markets remain under pressure as a result of the expected further tightening of the Chinese economy. So far European bourses are heading higher as is US equity futures markets suggesting a higher open on Wall Street this morning. Heading into the US trading session equity markets are modestly positive for oil prices as well as the broader commodity complex.
The US dollar is continuing to decline but only modestly and more as a result of the euro and other major currency pairs firming as the fundamentals of the US economy should provide a floor on the value of the US dollar. At the moment the direction of the US dollar is mildly positive for oil and commodity prices. This afternoon the market will be looking for any signs of a change in the US Central Bank's monetary policy when the results of the FOMC meeting are announced at 2:15 PM EST. The consensus is expecting no change in interest rates, a continuation of QE2 and guidance that suggests the US economy is still only growing slowly. Any deviations from the expectations will likely result in a quick reaction in the external markets...equities and currencies.
Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report. The API reported builds for crude oil and gasoline but a surprisingly large draw in distillate stocks. The API reported a crude oil inventory build of about 2.1 million barrels as refinery utilization rates declined strongly by 3.2% to 79.7% of capacity. The API also reported a big increase in crude oil imports of about 1 million barrels per day. They also showed a strong build in gasoline stocks of about 1.7 million barrels while distillate fuel stocks declined by about 5 million barrels as the weather last week in the main heating oil consuming part of the US was colder than normal. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish as prices have increased in overnight trading. In fact if today’s EIA report is in sync with the API report, it could result in a modest push to the upside, especially if the US dollar and equity markets remain supportive for oil prices.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report for US oil stocks. I am expecting a strong build of about 1.5 million barrels of crude oil inventories mostly as a result of the restart of the Alaska pipeline as well as a modest increase in imports. If the actual numbers are in sync with my projections the year-over-year surplus of crude oil would widen to 6.7 million barrels while the overhang versus the five-year average for the same week will also widen to 18.4 million barrels.
With runs expected to only increase by about 0.1% 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 2.1 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 surplus is projected to widen of around 2.3 million barrels while the surplus versus the five-year average for the same week will widen to about 9.1 million barrels. Gasoline inventories have turned the corner after going through a decent destocking phase. Gasoline stocks will have built for four weeks in a row if my projection for another build this week is in line with the actuals.
Distillate fuel likely built by decline modestly by 0.7 million barrels mostly as a result of the colder than normal temperatures we have been experiencing in the eastern half of the US. The latest short term temperature reports are still showing persistent cold temperatures along the eastern half of the US with extremely bitter cold weather hitting this week in many of the large population centers in the eastern half of the US. In fact one private forecaster (Accuweather) is suggesting that cold winter weather may last a lot longer than originally anticipated. 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 8 million barrels above last year while the overhang versus the five-year average will be around 23.9 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 to modestly bullish as total commercial stocks of crude oil and refined products combined are likely to have decreased marginally this 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 am maintaining my overall view and bias at neutral for oil as the market has lost its upside momentum and is looking like it is now in a corrective move to the downside with the potential to drop all the way to the next range support level of $83/bbl. We are clearly still in a technical and fundamentally driven longer term uptrend.
I am maintaining my Nat Gas view and bias to neutral as the market continues to struggle to hold onto any major gains. With supply still very robust even the colder than normal winter weather conditions do not seem to be enough to send prices into surge mode rather we can expect to see prices remaining in the trading range they have been for months for the foreseeable future. Weather is still one of the main contributors to price direction but the oversupply situation continues to dampen any upside enthusiasm that may come from above normal heating fuel demand.
Currently most markets are in positive territory as shown in the EMI Price Board table below.
Dominick A. Chirichella
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