“Presence is more than just being there.”
Malcolm S. Forbes
The combination of China raising interest rates and the situation in Egypt showing early signs of stabilizing still resulted in oil prices holding up relatively well on Tuesday. Prices were hit with a strong round of selling shortly after the China announcement but stabilized during the trading session. In fact Brent moved back and settled over the $100/bbl mark once again. Oil prices are trading around the levels they were at prior to the ramping up of the Egyptian protests with market participants now moving their focus back to the main drivers that have been impacting oil prices for the last two years…the direction of equity and currency markets, the pace of the global economic recovery and the state of the current and projected oil fundamentals. None of these drivers are currently overwhelmingly bullish or bearish, but in general the market is likely to remain in the wide trading range it has been in for quite some time with a modest bearish bias to the downside or suggestive that prices could work their way toward the lower end of the trading range…especially for WTI.
The equity markets have been taking the interest rate action in China relatively well having gained ground a bit over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is now higher by 0.2% for the week narrowing the year to date loss to 0.5%. China and Brazil remain the main negatives in the column for 2011 so far with Paris and Germany holding the top spots. China's Shanghai A shares declined modestly after being closed for a week (due to the New Year holiday) and after incorporating the latest interest rate rise by the Chinese government. The global equity markets remain neutral for oil prices in the short term as does the US dollar index which is hovering around the unchanged mark once again.
The EIA released the latest Short Term Energy Outlook this afternoon. Following are the main highlights of the report focused on oil. As expected this month's forecast is pretty much in line with last month's forecast and as such it has had little impact on price direction at the moment.
Crude Oil and Liquid Fuels Overview. EIA expects a continued tightening of world oil markets over the next two years. World oil consumption grows by an annual average of 1.5 million barrels per day (bbl/d) through 2012 while the growth in supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries averages about 0.3 million bbl/d this year and remains flat in 2012. Consequently, EIA expects the market will rely on both inventories and significant increases in the production of crude oil and non-crude liquids in OPEC member countries to meet world demand growth. While on-shore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained high last year, floating oil storage fell sharply in 2010, and EIA expects that OECD oil inventories will decline over the forecast period to close to the middle of the previous five-year range by the end of 2012.
There are many significant uncertainties that could push oil prices higher or lower than current expectations. Among the uncertainties are decisions by key OPEC member countries regarding their production response to the global recovery in oil demand; the rate of economic recovery, both domestically and globally; fiscal issues facing national and sub-national governments; and China’s efforts to address concerns regarding its growth and inflation rates. In addition, even though Egypt is not a major supplier of crude oil or natural gas to world markets, the recent unrest in that country raises the concern that unrest could spread to other countries in the region with a larger role in supplying world energy markets or that key transit routes for energy and other goods could be disrupted.
Global Crude Oil and Liquid Fuels Consumption. World crude oil and liquid fuels consumption grew by an estimated 2.4 million bbl/d in 2010, to 86.7 million bbl/d, the second largest annual increase in at least 30 years. This growth more than offset the losses of the previous two years and surpassed the 2007 level of 86.3 million bbl/d reached prior to the economic downturn. EIA expects that world liquid fuels consumption will grow by 1.5 million bbl/d in 2011 and by an additional 1.6 million bbl/d in 2012. Non-OECD countries make up almost all of the growth in consumption over the next 2 years, with the largest contributions coming from China, Brazil, and the Middle East. Among the OECD regions, EIA expects that only North America will show oil consumption growth over the next 2 years, which will be offset by continued declines in OECD Europe and Asia.
Non-OPEC Supply. EIA projects non-OPEC crude oil and liquid fuels production will increase by 310,000 bbl/d in 2011, then decline slightly in 2012. Increases in non-OPEC oil production will be concentrated in a few countries, particularly in China and Brazil, where EIA expects each to show annual average production growth of 170,000 bbl/d in 2011. In 2012, EIA expects Canadian production growth to average 170,000 bbl/d while China and Brazil grow by 130,000 and 110,000 bbl/d, respectively. Other non-OPEC production is expected to decline. EIA expects Mexico's production will fall by about 210,000 bbl/d in 2011, followed by a further decline of 80,000 bbl/d in 2012. Similarly, production from the North Sea falls by 220,000 bbl/d and 160,000 bbl/d in 2011 and 2012, respectively. Projected U.S. crude oil production declines by 50,000 bbl/d in 2011 and by a further 190,000 bbl/d in 2012.
OPEC Supply. Forecast OPEC crude oil production increases by 0.4 million bbl/d in 2011, followed by a further increase of 1.2 million bbl/d in 2012. These production increases are in response to the increase in global demand for oil and limited growth in supplies originating in non-OPEC countries. Non-crude liquids production is expected to increase by 0.7 and 0.4 million bbl/d in 2011 and 2012, respectively. EIA expects that OPEC surplus production capacity will remain above 4 million bbl/d during the next 2 years.
OECD Petroleum Inventories. Onshore commercial oil inventories in the OECD countries remained high last year, but reports indicate floating oil storage fell sharply. Now that floating storage has been reduced, EIA expects that OECD onshore inventories will decline over the forecast period. Projected OECD stocks fall by about 55 million barrels in 2011, followed by an additional 60 million barrel decline in 2012. Days-of-supply (total inventories divided by average daily consumption) drops from 57 days to 55 days between December 2010 and the end of 2012, which is close to the middle of the previous five-year range.
U.S. Liquid Fuels Consumption. Total consumption of petroleum and non-petroleum liquid fuels increased by 360,000 bbl/d (1.9 percent) to 19.1 million bbl/d in 2010. The major sources of this consumption growth were distillate fuel oil (diesel fuel and heating oil), which grew by 140,000 bbl/d (3.8 percent), and motor gasoline, which increased by 60,000 bbl/d (0.6 percent). Projected total U.S. liquid fuels consumption increases by 140,000 bbl/d (0.8 percent) in 2011 and a further 170,000 bbl/d (0.9 percent), to 19.5 million bbl/d, in 2012. Motor gasoline and distillate fuel account for much of the growth in consumption.
Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report. The API reported a surprise decline in crude oil stocks, a greater than expected build in gasoline stocks and a draw in distillate fuel inventories that came in below the expectations. The API reported a crude oil inventory draw of about 600,000 barrels even as refinery utilization rates increased by only 0.1% to 83.3% of capacity. The API also reported a decline in crude oil imports and a modest decline in PADD 2 stocks. They also showed a strong build in gasoline stocks of about 3.2 million barrels while distillate fuel stocks declined by about 500,000 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 bullish as prices have increased in overnight trading. In fact if today’s EIA report is in sync with the API report I would view it as modestly negative as both gasoline and distillate fuel stocks underperformed versus expectations and the crude oil decline …although a positive was still minor compared to the large overhang of crude oil that still exists in the US.
My projection for this week’s EIA inventory report is summarized in the following table. I am expecting a mixed report for US oil stocks but yet another overall build in total commercial stocks of crude oil and refined products combined. I am expecting another strong build of about 2.5 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 come in at 14.3 million barrels while the overhang versus the five year average for the same week will be about 20.2 million barrels.
With runs expected to only decrease by about 0.1% and with imports expected to increase a bit I am expecting another strong increase in gasoline stocks. Gasoline stocks are expected to build by about 1.5 million barrels which would result in gasoline stocks hovering around 20-year highs for this time of the year. This week the gasoline year over year surplus is projected to widen of around 7.3 million barrels while the surplus versus the five-year average for the same week will widen to about 12.5 million barrels. Gasoline stocks will have built for seven weeks in a row if my projection for another build this week is in line with the actual. If so, gasoline stocks will have increased by about 20 million barrels over the aforementioned timeframe.
Distillate fuel is projected to decline modestly by 1.3 million barrels mostly as a result of the colder than normal temperatures we have been experiencing in the eastern half of the US. As has been the case for the last seven weeks or so it is only heating oil stocks that have been destocking as diesel fuel inventories have been rising strongly over the last two months as the US economy continues to grow very slowly. The latest NOAA weather forecasts are now calling for a return to not only normal winter temperatures but above normal temperatures for a good portion of the second half of February. With the vast majority of the winter heating season now in the history books, the consistent decline in heating oil stocks may also start to perform much like diesel stocks have been over the last several months and that is to start into a premature inventory building pattern during the projecting moderation of temperatures during the second half of February. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 6.6 million barrels above last year while the overhang versus the five-year average will be around 23.4 million barrels.
Refiners are continuing to try to manage the overhang of crude oil by converting into refined products and moving products into inventory. Net result the US continues to remain well oversupplied of just about everything in the oil complex with supply expected to remain robust for the foreseeable future. The market will get a snapshot of projected fundamentals when the EIA released tier latest Short Term Energy Outlook early this afternoon. As mentioned yesterday I am expecting the EIA to keep their global oil demand projections pretty much at the same level as last month's report but we could see inventory projections coming in a bit less optimistic than last month. Overall I would expect today's report to be neutral at best and have a minimal impact on short term price direction at best.
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.
My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my overall view at neutral and my short term bias at bearish for oil as the market is continuing to eliminate the Egypt factor from the price and quickly incorporating the China inflation effect…which is a mild negative.
I am maintaining my Nat Gas view at neutral and my short term bias at bearish as the weather projections for the second half of February are simply not supportive for Nat Gas prices. With supply still very robust and the advent of a round of warmer than normal winter weather conditions prices are likely to test the psychological and technical $4/mmbtu support levels. 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 positive as shown in the EMI Price Board table below.
Dominick A. Chirichella
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