The infinite! No other question has ever moved so profoundly the spirit of man.
G. H. Hardy
With instability still prevalent in Libya and the fighting continuing between the opposition forces and those loyal to Gaddafi, the price of oil is hovering near the unchanged mark for WTI and modestly higher for Brent so far today. There were talks yesterday that Gaddafi's inner circle has debated his exit. However, the bombing of Libyan citizens continued for yet another day. NATO is also debating whether or not to institute a no fly zone with no resolution to that issue yet evident. Irrespective as to how Libya evolves for the rest of this week, many investor/traders are becoming more focused on what will be the outcome of the day of rage protests in Saudi Arabia called for this coming Friday. If it is a non-event and Libya looks like it is improving, oil prices are likely to be on the defensive. On the other hand, if there is any possibility that the protests in Saudi Arabia could grow into something like Libya or Egypt, oil prices will head higher and test the next WTI technical support level of around $110/bbl. For the moment, the current technical support level of WTI is around the $103.50/bbl level and holding.
The Brent/WTI spread was pounded yet again on Tuesday with Brent shedding another $2/bbl of its premium as the market was in full blow profit taking selling of the spread. The selling has backed off a bit overnight or since yesterday afternoon's API report showed a huge, surprise build of 3.8 million barrels in US crude oil stocks as well as another huge build in PADD 2 stocks of about 1.8 million barrels. If today's EIA report shows similar data, the Brent/WTI spread might not move to test the next support level of the spread of about $7/bbl premium to Brent just yet. On the other hand if the data is the least bit bullish for WTI, we can expect to see the spread breach the $7/bbl level and likely trade back down to about $4/bbl. Today's EIA inventory report will dictate the next major move for the spread.
After a strong performance in US equities on Tuesday the rest of the world's market have been mixed as shown in the EMI Global Equity table below. The EMI Index has been marginally higher over the last 24 hours. The Index is up by 0.1% so far this week bringing the year to date gain to 1.3%. Brazil continues to be the only bourse in negative territory for 2011 with the developed world (as a group) still outpacing the emerging market world bourses... although China's Shanghai A shares have now moved into the top of the winner's column for the first time since 2009. Investor/traders seem to like the inflation fighting approach of the Chinese government and has given it a vote of confidence by buying into the equity markets in China. The global equity markets have been mostly neutral for oil prices.
Yesterday, the EIA released their latest Short Term Energy Outlook. I agree with the EIA assessment of supply from OPEC to make up for Libya as well as a corresponding reduction in surplus capacity of crude oil. Their estimates of surplus capacity are in line with what I mentioned in yesterday's newsletter. On the other hand I am not in agreement with their assessment of global oil consumption. I would expect demand growth to start to slowly decline on a combination of higher prices, potentially higher interest rates in the developed world...especially Europe as well as a continuation of tight monetary policies in many of the higher oil growth emerging markets like China. Following are the main highlights of the report.
· EIA has raised its forecast for the average cost of crude oil to refiners to $105 per barrel in 2011, $14 higher than in the previous Outlook. However, EIA has raised its 2011 forecast for WTI by only $9 per barrel to $102 per barrel because of the projected continued price discount for this type of crude compared with other crudes.
· Crude Oil and Liquid Fuels Overview. EIA expects continued tightening of world oil markets over the next two years, particularly in light of the recent events in North Africa and the Middle East, the world's largest oil producing region. The current situation in Libya increases oil market uncertainty because, according to various reports, much of the country's 1.8-million bbl/d total liquids production has been shut in and it is unclear how long this situation will continue. The market remains concerned that the unrest in the region could continue to spread. There are many reasons for market uncertainty that could push oil prices higher or lower than current expectations. Among the uncertainties are: the continued unrest in producing countries and its potential impact on supply; decisions by key OPEC member countries regarding their production response to the global recovery in oil demand and recent supply losses; 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.
· 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 reductions in demand during the prior two years and surpassed the 2007 consumption level of 86.3 million bbl/d. EIA expects that world liquid fuels consumption will grow by 1.5 million bbl/d in 2011 and by an additional 1.7 million bbl/d in 2012. Non-OECD countries will make up almost all of the growth in consumption over the next two years, with the largest demand increases coming from China, Brazil, and the Middle East. EIA expects that, among the OECD regions, only North America will show growth in oil consumption over the next two years, offsetting declines in OECD Europe and Asia.
· Non-OPEC Supply. EIA projects that non-OPEC crude oil and liquid fuels production will increase by 170,000 bbl/d in 2011, then decline slightly in 2012. Increases in non-OPEC oil production during 2011 will be concentrated in a few countries, particularly China and Brazil, where EIA expects annual average production growth of 140,000 and 170,000 bbl/d, respectively. In 2012, EIA expects Canadian production growth to average 170,000 bbl/d while China and Brazil grow by 140,000 and 110,000 bbl/d, respectively. Other non-OPEC production is expected to decline. EIA expects that Mexico's production will fall by about 220,000 bbl/d in 2011, followed by a further decline of 80,000 bbl/d in 2012. Similarly, production from the North Sea will fall by 210,000 bbl/d and 170,000 bbl/d in 2011 and 2012, respectively. EIA expects the former Soviet Union republics to increase production by 320,000 bbl/d in 2011, followed by a production decrease of 180,000 bbl/d in 2012 mainly driven by decreases in Russia, whose West Siberian fields are expected to decline significantly. Projected U.S. crude oil and liquid fuels production declines by 100,000 bbl/d in 2011 and by a further 160,000 bbl/d in 2012.
· OPEC Supply. EIA expects that lost crude oil production from Libya will be made up for by both drawdown of inventories and increases in production from other OPEC countries. Forecast OPEC crude oil and non-crude liquids production increase by 0.1 million bbl/d and by 0.7 million bbl/d in 2011, respectively. Continuing growth in global demand for oil and limited growth in supplies originating from non-OPEC countries contribute to an increase in OPEC crude oil production of 1.9 million bbl/d in 2012. EIA expects growth in OPEC non-crude liquids production to slow to 0.3 million bbl/d in 2012. EIA has revised its projected OPEC surplus capacity downward, compared with the last Outlook, as assumptions underlying these projections changed in light of the unrest in Libya. As a result, EIA projects that OPEC surplus capacity will fall from an average 4.4 million bbl/d in 2010 to 4.1 million bbl/d in 2011, followed by a further decline to 3.1 million bbl/d in 2012.
· OECD Petroleum Inventories. Onshore commercial oil inventories in the OECD countries remained high in 2010, but reports indicate that floating oil storage fell sharply. EIA expects that OECD onshore inventories will decline over the forecast period. Projected OECD stocks fall by about 111 million barrels in 2011, followed by an additional 38 million barrel decline in 2012. Days of supply (total inventories divided by average daily consumption) drops from a relatively high 57 days at the end of 2010 to 55 days by the end of 2011, which is close to the middle of the previous 5-year range.
Late yesterday afternoon the API released their latest inventory assessment. The API report was mixed. The API reported across the board declines in refined product stocks but a surprisingly large build in crude oil stocks, even as refinery runs increased modestly by 1.5%. The API reported a crude oil inventory build of about 3.8 million barrels as refinery utilization rates increased by 1.5% to 79.9% of capacity. The API also reported a decline in crude oil imports of about 700,000 barrels per day. They also showed another huge draw in gasoline stocks of about 3.7 million barrels while distillate fuel stocks declined by about 1.5 million. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish for refined products as prices have increased in overnight trading but the vast majority of the gain in crude oil prices is more related to the turmoil in Libya. If today’s EIA report is in sync with the API report I would view it as neutral at best.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report with a modest build in total commercial stocks of crude oil, but a decline in refined products inventories as refinery runs likely declined marginally on the week. I am expecting crude oil stocks to build by about 1.3 million barrels. If the actual numbers are in sync with my projections, the year-over-year surplus of crude oil would come in at 4.7 million barrels while the overhang versus the five-year average for the same week will be about 14.7 million barrels.
With runs expected to decrease by about 0.2% and with imports expected to hold steady, I am expecting a modest decline in gasoline stocks. Gasoline stocks are expected to draw by about 1.9 million barrels which would result in the gasoline year over-year-surplus to narrow to around 3.8 million barrels while the surplus versus the five-year average for the same week will narrow to about 9.1 million barrels.
Distillate fuel is projected to decrease marginally by 0.3 million barrels on a combination of mild weather demand as well as a decline in production. The latest NOAA weather forecasts are now showing a significant portion of the US expected to experience above normal temperatures for the rest of March. The forecasts are a negative for heating oil, especially after the last several weeks of less than bullish inventory reports.
With the vast majority of the winter heating season now in the history books 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 as the latest weather forecast almost guarantees that the net withdrawals from inventory for the rest of the official winter heating season will likely come in at below normal levels. If so, the inventory building season may get a bit of a jumpstart in starting to replace the volume consumed this year. If the actual EIA data is in sync with my distillate fuel projection, inventories versus last year will likely now be about 9.3 million barrels above last year while the overhang versus the five-year average will be around 25.7 million barrels. 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.
As usual do not overreact to the API data as the EIA report will be released in a few hours. The API report more often than not it is 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 neutral as total commercial stocks of crude oil and refined products combined are likely to have decreased only marginally. However, if the EIA data is more in line with the API data the market will likely view it as neutral or non-event from a macro overview and a negative for WTI versus Brent. Whether or not the market reacts at all to the inventory report will be dependent on what is going on with the evolving situation in North Africa and the Middle East as well as 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 to be in sync with my bullish bias for all of the reasons I have been discussing over the last week. But again I raise the caution flag that prices are still overdone and susceptible to a correction. Any event can trigger a sudden change in the direction of prices. Be cautious and use tight, trailing stops in your short term trading book. This week is likely to continue to be all about the evolving situation in North Africa and the Middle s East especially Saudi Arabia on Friday a so called for day of rage protest.
I am maintaining my Nat Gas view at neutral but moved my bias back to cautiously bearish even though I still think the Nat Gas market is still range bound but now that the market has breached another key technical support level it is likely to continue to drift lower in the short term.
Currently oil markets are mixed as shown in the EMI Price Board table below.
Dominick A. Chirichella
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