“If you can find a path with no obstacles, it probably does not lead anywhere.”
Oil prices are drifting lower as the situation in Egypt seems to be stabilizing. Egyptian President Hosni Mubarak said he will step down from power after his term expires this fall, for the first time setting a date to end his 30 year run as Egypt's leader. He said in his speech that he had shouldered many responsibilities for Egypt but needed to hand over power to ensure the stability of the country. "I've spent enough time serving Egypt," Mr. Mubarak said. Although he clearly indicated he will not seek reelection in the September the protestors have continued to demonstrate and said they will until he leaves. I would expect the protesting to slow and the situation to return to normal in Egypt as the populace digests the fact that they can see the forest from the trees in that he will be gone in about 7 months.
In other news from the region, the King of Jordon dismissed his entire government on Tuesday and appointed a new prime minister as protests mounted in that country. Contagion around the rest of the Middle East is still a major concern of market participants around the world which has helped to keep the Brent crude oil contract over the $100/bbl mark all week. That said, if in fact the Egyptian situation does begin to stabilize (which I believe it will) oil prices are now at risk for a downside correction as the Egyptian turmoil has not resulted in any lost oil supply nor any interruption in flow through the two main transit points in Egypt. In addition if last night's API data is indicative of what we can expect from the EIA report, the market will get another bearish fundamental snapshot which could easily serve as a catalyst for the downside correction.
On the financial front global equities have staged a recovery rally and have now regained most all of the losses from late last week when the Egyptian situation moved into the mainstream. The EMI Global Equity Index (see table below) is now up by 1.5% on the week returning the Index to positive territory for the year to date at 0.7%. Only China and Brazil remain in negative territory for the year as all ten indices gained ground over the last twenty four hours. The situation in the equity markets is mostly back to pre-Egypt levels with most participants once again beginning to focus their attention back to the macro economic data.
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 and a modest draw in distillate stocks. The API reported a crude oil inventory build of about 3.8 million barrels even as refinery utilization rates increased strongly by 3.5% to 83.2% of capacity. The API also reported a decline in crude oil imports but builds in both PADD 2 and Cushing, OK. They also showed a strong build in gasoline stocks of about 3.9 million barrels while distillate fuel stocks declined by about 1.1 million barrels as the weather last week in the main heating oil consuming part of the US was modestly cold. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bearish as prices have decreased 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 downside, especially if the Egyptian situation continues to stabilize.
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 another strong build of about 2.2 million barrels of crude oil inventories mostly as a result of the industry readjusting inventories after managing end of year stock levels 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 16.1 million barrels while the overhang versus the five-year average for the same week will also widen to 21.9 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 1.5 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 3.1 million barrels while the surplus versus the five-year average for the same week will narrow to about 8.4 million barrels. Gasoline inventories have turned the corner after going through a decent destocking phase. Gasoline stocks will have built for five weeks in a row if my projection for another build this week is in line with the actuals.
Distillate fuel likely declined 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 most 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. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 7.4 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 bearish as total commercial stocks of crude oil and refined products combined are likely to have increased 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 view is 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 is currently trading around the evolving situation in the Middle East. Absent Egypt, oil prices are likely to have remained in a downside correction as they were earlier in the week.
As I suggested yesterday Mubarak now has one foot out of the door and some level of stability will come back to Egypt as the country sets it sights on new elections in September and possibly the beginning of a democratic state. Oil flow through Egypt (Suez Canal and Sumed Pipeline) has not been interrupted and I do not think it will be. We are clearly still in a technical and fundamentally driven longer term uptrend but the market is very susceptible for a downward correction in prices.
I am maintaining my Nat Gas view and bias at neutral as the market continues to struggle to hold onto any major gains. With supply still very robust, even the advent of another round of colder than normal winter weather conditions may not seem to be enough to send prices into surge mode, rather I am still expecting to see prices remaining in the trading range they have been for months for the foreseeable future. Weather is still the main driver of 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 lower as of Asian trading hours as shown in the EMI Price Board table below.
Dominick A. Chirichella
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