Quote of the Day
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Some of yesterday's weak shorts quickly exited the market today (in a low trading volume level session) as uncertainty continued to cloud the evolving situation in Libya. Today the market was still digesting yesterday's statement by the opposition group indicating that some production could be resumed as soon as about a week or so. Today, many market participants were a bit less confident that supply will return that quickly and as such some of yesterday's losses were erased in a partial reinstatement of the fear on trade mentality. That all said, I do not think today's activity was significant or the beginning of a new major upward surge in prices in the very short-term (barring some unforeseen change of events in the Middle East). As I discussed in detail in yesterday's report, there is no shortage of oil anyplace in the world (see today's API crude oil stock build below as an example) and whether or not Libyan oil partially hits the market or not, it will not make a material difference to the overall supply & demand balances. The major impact the resumption of some Libyan oil will have is to narrow the sweet/sour crude oil differentials that have widened out strongly since the Libyan revolution.
On the financial side of the equation, the global equity markets have been mostly neutral for oil prices as well as the broader commodity complex so far this week as shown in the EMI Global Equity Index table below. On the week the Index is currently 0.3% lower widening the year to date loss for the Index to 0.6%. The US Dow has moved into the top spot of the winner's column for 2011 with China's Shanghai A bourse holding a close second place. Market participants are still very comfortable with the US Central Bank program of fueling asset values via a continuation of QE2 while China is looking more and more favorable as the Chinese Central Bank continues to battle back inflation risk. Two distinctly different monetary policies at the moment and both currently being somewhat embraced by the market!
With the Japanese disaster and the evolving situation in Libya being well priced into most asset instruments, the market sentiment may be switching its focus for directional guidance back to the equities and currency markets. For the moment both of these market are mostly neutral for the commodity complex. However, it is looking more and more likely that both the euro and the US dollar are heading toward a period where they may begin to strengthen versus other major currency pairs as both the ECB and the US Fed's next monetary move is likely to begin to slowly raise interest rates. Currency traders are starting to anticipate these events which could result in a firming pattern for both of these currencies well before the event actually takes place. If so, it would be modestly bearish for commodities…including oil.
Late today the API released their latest inventory assessment. The API report was mixed but only modestly biased to the bullish side (gasoline in particular). The API reported a crude oil inventory build of about 5.7 million barrels even as refinery utilization rates increased by 0.7% to 83.3% of capacity. The API also reported a small decrease in crude oil imports which did little to offset the increase in refinery run rates. PADD 2 stocks surged higher by about 4.1 million barrels after the previous API report showed a small decline in stocks in that region. They also showed a strong draw in gasoline stocks of about 2.0 million barrels while distillate fuel stocks declined by only 0.1 million (so much for the colder than normal temperatures last week). 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 and marginally bearish for crude oil. If Wednesday’s EIA report is in sync with the API report I would view it as mostly neutral.
My projections for this week’s inventory reports are summarized in the following table. I am expecting another mixed report with a modest build in total commercial stocks of crude oil but a decline in refined products inventories even as refinery runs are likely to increase marginally on the week. I am expecting crude oil stocks to build by about 2.3 million barrels. If the actual numbers are in sync with my projections the year-over-year surplus of crude oil would come in at just 0.8 million barrels while the overhang versus the five-year average for the same week will be about 14.6 million barrels.
With runs expected to increase 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 1.0 million barrels which would result in the gasoline year-over-year deficit widening to 6.2 million barrels while the surplus versus the five-year average for the same week will narrow to only 0.2 million barrels.
Distillate fuel is projected to decrease modestly by 0.9 million barrels on a combination of some weather demand as well as a decline in production. The latest round of short-term weather forecasts (six to ten day and eight to fourteen day) are decidedly less bullish than the forecasts circulating around the market just last week. In fact the current eight to 14 day forecast out of NOAA is actually starting to show a noticeably large part of the US southeast expecting above normal temperatures in the not too distant future. The weather forecasts are quickly turning more neutral to bearish leaving little else out there to suggest that the market will see above normal heating oil inventory withdrawals over the next several weeks. At the moment the weather forecasts are a negative for heating oil especially.
Irrespective of the weather forecast, it is now spring and low temperatures are not nearly as severe as they are in the heart of the winter and as such I do not expect any large increase in heating oil consumption that would result in above normal draws from inventory. If the actual EIA data is in sync with my distillate fuel projection, inventories versus last year will likely now be about 7.1 million barrels above last year while the overhang versus the five-year average will be around 24.8 million barrels.
Net result the US continues to remain well supplied of just about everything in the oil complex but stocks are in a destocking pattern in general. The major wild card for distillate fuel over the next three to six months will be how much additional diesel fuel is going to be required by Japan. It is likely that Japan's import requirements for diesel fuel will increase strongly once the nuclear situation is stabilized and the country enters into the rebuilding and reconstruction phase especially with a large percentage of the refining capacity in Japan shut in.
As usual do not overreact to the API data as the EIA report will be released tomorrow. The API report more often than not is not in line with the more widely followed EIA data. If the EIA report is within the projections 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. If the EIA data is more in line with the API data the market will likely also view it as neutral from a macro overview and a strong negative for the WTI versus Brent spread. Whether or not the market reacts at all to the inventory report will be dependent on what is going on in North Africa and the Middle East 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 bias at cautiously bullish as the market is still focused on the geopolitics of North Africa and the Middle East. I am leaving my view at neutral for the moment as I think we are now in a fear-off mentality and in the beginning of the downside price correction that I have been suggesting would occur. I also think we are still in a buy the dip mode for oil but not until we see the downside correction play out a bit more than what we have seen so far.
I am maintaining my Nat Gas view at neutral and downgrading my bias also to neutral as prices are once again likely to be mired in a range for the foreseeable future.
Currently asset classes were mixed today as shown in the EMI Price Board table below.
Dominick A. Chirichella
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