There is nothing sillier than a silly laugh.
Catullus
Yesterday was mostly a risk asset off trading day as commodity prices were hit with a strong round of selling coming from all corners of the market. Oil prices were pummeled for the second day in a row with WTI falling around $8/bbl over the last two days while Brent declined about $7/bbl over the same timeframe. As I have been suggesting the market has been susceptible to a downside correction which is how I would categorize this week's trading activity so far. Even with the current downside price move both WTI and Brent remain in overvalued territory based on the overall global supply and demand profile of the complex. Further accelerating some of yesterday's selling was yet another recommendation by Goldman that hit the media airwaves suggesting that its clients close down their long oil positions (as well as several other commodities) as prices hit their objective prematurely.
So far this morning the selling has subsided and oil prices are trading marginally higher. The situation in Libya rages on with no end in sight at this point in time as the African Union diplomatic initiative has now been rejected by the opposition group as well as the international community as it did not include a removal of Gaddafi from power. About 1 million barrels per day of oil remains shut-in as a result of the Libyan conflict. However, Saudi Arabia indicated yesterday that they have actually reduced their production level based on a lack of demand. Saudi Arabia quickly increased production after Libyan oil was shut-in to make up for Libya but some of the demand for that make-up production has been slowing. This is just another point on the curve that indicates there is no shortage of oil anyplace in the world. The risk or fear premium has receded a bit and may continue to recede further from current levels but until complete stability comes to the region the risk premium will not go away completely.
Global equity values are also rebounding in overnight trading as shown in the EMI Global Equity Index table below. Although the week to date loss for the Index widened to 1.9% (mostly due to losses incurred during yesterday's trading hours) most bourses are in positive territory since Asian trading began including US equity futures which are currently pointing to a higher opening on Wall Street this morning. China remains solidly on top of the winner's column for the year to date with several developed world bourses bunching up behind China. The next several weeks or so will be a volatile period for global equities as the quarterly earnings season is just getting underway with all eyes focused on how the meteoric rise in oil prices as well as most other commodities is impacting not only current earnings but going forward guidance. For today equities are a positive for oil prices.
Yesterday the EIA released their latest Short Term Energy Outlook Report. Overall the report was supportive for oil prices and mostly in sync with the IEA report released earlier in the day. Following are the main highlights of the report covering oil.
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.
The forecast for total world oil consumption grows by an annual average of 1.6 million bbl/d through 2012. Supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries grows about 0.2 million bbl/d this year, then falls slightly in 2012. Consequently, EIA expects that 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 projected world demand growth. Onshore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained high in 2010, but floating oil storage fell sharply. EIA expects that OECD oil inventories will decline to the lower bound of the previous 5-year range by the end of 2012.
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 2 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.
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.
U.S. Liquid Fuels Consumption. Total consumption of petroleum and non-petroleum liquid fuels increased by 380,000 bbl/d (2.0 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 160,000 bbl/d (4.5 percent), and motor gasoline, which increased by 40,000 bbl/d (0.4 percent). Projected total U.S. liquid fuels consumption increases by 130,000 bbl/d (0.7 percent) in 2011, and by a further 190,000 bbl/d (1.0 percent), to 19.5 million bbl/d, in 2012. As in 2010, 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 report was mixed and modestly biased to the bullish side. The API reported a crude oil inventory build of about 1.2 million barrels as refinery utilization rates plummeted by 5.1% to 78.9% of capacity. The API reported a large decrease in crude oil imports. PADD 2 stocks were about unchanged after declining strongly in the previous API report. They showed large surprise declines in inventory for both gasoline and distillate fuel stocks. Gasoline stocks declined by about 4.6 million barrels while distillate fuel stocks were lower by 3.7 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 although prices are in the midst of adjusting after the slide over the last two sessions. If Wednesday’s EIA report is in sync with the API report I would view it as biased to the bullish side.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a somewhat bearish report with a modest build in total commercial stocks of crude oil and refined products inventories as refinery runs are likely to increase marginally on the week. I am expecting crude oil stocks to build by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil would widen modestly to 5 million barrels while the overhang versus the five year average for the same week will also widen to 16.3 million barrels.
Even with refinery runs expected to increase by about 0.3% and with imports expected to hold steady I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to draw by about 0.7 million barrels which would result in the gasoline year over year deficit widening to 5.4 million barrels while the surplus versus the five year average for the same week will widen to 5.4 million barrels.
Distillate fuel is projected to increase modestly by 0.5 million barrels on a combination of minimal weather demand as well as an increase in production. The latest NOAA forecast is projecting above normal temperatures across portions of the US for the next several weeks thus reducing any hopes for a continuation of atypical spring heating related consumption. The forecasts are a negative for heating oil especially after the last several weeks of bullish weather reports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 7.2 million barrels above last year while the overhang versus the five year average will be around 29.1 million barrels. With the beginning of the inventory injection season about to start for heating oil and with total distillate fuel inventories already at very comfortable levels there are not likely to be any supply issues anytime soon.
Net result the US continues to remain well supplied of just about everything in the oil complex and stocks are not yet in a sustained 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 this morning. The API report is not in line with the more widely followed EIA data more often than not and as such it is always prudent to verify the API results by waiting a few more hours for the EIA data to be released. If the EIA report is within the projections I would expect the market to view the results as neutral. If the EIA data is more in line with the API data the market will likely view it as biased to the bullish side from a macro overview and a mild positive 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 with eh events of the day.
My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my bias and view at neutral until the market sorts out the conflicting events and also to see how deep the current downside price correction will be. Throughout the upward move in oil prices over the last several months the corrections have been relatively shallow and short lived and thus buying opportunities. With prices already starting to impact demand and with more countries starting to tighten monetary policy the downside could be deep and longer lasting this time. That said we are now in a watch mode and suggest those that remain long to work with very tight stops and possibly think of moving to the sidelines until the dust settles.
I am maintaining both my Nat Gas view and bias at neutral as prices are once again prices are likely to remain mired in a range for the foreseeable future.
Currently asset classes are mostly higher so far in overnight trading as shown in the EMI Price Board table below.
Best Regards,
Dominick A. Chirichella
