Quote of the Day
I don't know the key to success, but the key to failure is trying to please everybody.
Bill Cosby
Today is Bernanke’s day. The business media have been covering the US Federal Reserve's first ever press conference after an FOMC meeting around the clock. There is so much build up to this press conference that, like with most things that are highly and widely anticipated, often times the actual event turns out to be a non event. It reminds me of a song "Is that all there is" that we may be singing after the press conference is over. Overnight oil prices were mostly range bound in quiet trading ahead of this morning's EIA oil inventory report as well as the big Bernanke press conference. Last night's API inventory report (see below for more details) was mostly neutral. However, unless the EIA report is grossly different from the expectations, I do not expect much of a price reaction until after the FOMC press conference is over and digested.
Where the price of oil goes from here in the short-term will be mostly dependent on how the US dollar trades over the next few days. The US dollar Index is continuing to hover near levels not seen since the middle of 2008 and the only reason why it is not moving with more momentum (in either direction at the moment) is due to market participants waiting on the Bernanke press conference. As discussed in detail the market will be primarily looking for any clues as to the status of QE2, when the Fed will switch to a less accommodative policy, Bernanke's view on inflation as well as the state of the US economic recovery.
Leading up to this meeting the market view has been that the Fed will continue to keep their foot on the accelerator of easy money for the short to medium term. If there is any deviation from that view (signs of tightening sooner than later) I would expect a strong short covering rally to ensue in the US dollar which will in turn result in equities, oil and commodities declining. I would be very surprised if the Fed announced any change in their monetary policy today either in the FOMC minutes or during the press conference. The US economic recovery has certainly not been very robust and any indications of a switch in monetary policy is likely to result in an even slower economic recovery with unemployment remaining at unacceptably high levels for an extended period of time. I think Bernanke will present a picture of a slow but improving economic recovery and indicate that when the data supports it the Fed will take the necessary steps to fight inflation. For now all is status quo in Fed policy. If that scenario is the end result today I would expect a modest sell-off of equities and oil in a “buy the rumor & sell the fact” type short-term trade. But when the dust settles, the US dollar will move lower and equities, oil and commodities will resume their upward movement.
Global equity markets were firm in quiet trading ahead of the US Fed press conference. The EMI Global Equity Index has recovered all of its early week losses and is now actually unchanged on the week pushing the year to date gain back to 0.6%. Over the last 24 hours, China, Hong Kong and Australia were the only laggards with all of the other bourses gaining ground. The US Dow is now clearly on the top of the leaders board for 2011 with Germany and Paris now closely behind. China has dropped down to the middle of the pack after holding the lead for the last month or so. Investor/traders continue to buy US equities on the premise that the so called Bernanke put (or easy money) remains in place for the foreseeable future. In the UK the latest GDP number released this morning came in within expectations and an improvement over last quarter... a positive for UK and European equities. Heading into today the global equity markets are mostly supportive for oil prices as is the weaker US dollar.
Late yesterday afternoon the API released their latest inventory assessment. The API report was mixed and mostly neutral. The API reported a crude oil inventory build of about 4.9 million barrels as refinery utilization rates only increased by 0.3% to 81.6% of capacity. The API reported a big jump up in crude oil imports. PADD 2 stocks were marginally higher after declining in the previous API report. They showed large surprise declines in inventory for gasoline but a larger than expected build in distillate fuel stocks. Gasoline stocks declined by about 2.1 million barrels while distillate fuel stocks were increased by 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 although the market is in quiet mode ahead of all of today's macro events. If Wednesday’s EIA report is in sync with the API report I would view it as neutral.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed to bearish report with a modest build in total commercial stocks of crude oil and distillate fuel inventories but another decline in gasoline stocks as refinery runs are likely to increase only marginally on the week. I am expecting crude oil stocks to build by about 0.9 million barrels. If the actual numbers are in sync with my projections the year-over-year surplus of crude oil would come in around 0.1 million barrels while the overhang versus the five-year average for the same week will also narrow to 11 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 1 million barrels which would result in the gasoline year-over-year deficit widening to 16.6 million barrels while the surplus versus the five-year average for the same week move into a deficit of 1.5 million barrels.
Distillate fuel is projected to increase modestly by 0.6 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 2.9 million barrels below last year while the overhang versus the five-year average will be around 22.2 million barrels. With the beginning of the inventory injection season now underway 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 but with the accelerated decline in gasoline stocks and the overall destocking pattern in general the fundamentals are becoming more of a supporting factor for the first time in several years.
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 the events of the day.
On a weather note WSI still sees an active upcoming hurricane season this year, predicting 15 named storms, eight hurricanes and four intense hurricanes at Category 3 strength or greater. The Atlantic hurricane season runs from June 30 through Nov. 30 each year. The current forecast is down slightly from WSI's prior forecast issued in December 2010 that called for 17 named storms, nine hurricanes and five intense hurricanes. The latest forecast numbers are above the long-term averages of 12 named storms, seven hurricanes and three intense hurricanes and match the averages from the more active recent period (1995-2010) of 15, eight and four.
They reduced their forecast numbers to 'active-normal' levels as a result of the cooling of the tropical Atlantic sea surface temperatures. Further, the La Nina event weakened a bit more quickly than they first expected.
My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my view at neutral and my bias at cautiously bullish as Brent and WTI are still both trading well above the latest technical support level. The market is susceptible to a downside correction which could come as part of a round of book squaring ahead of the Fed FOMC press conference tomorrow.
I am maintaining both my Nat Gas view and bias at neutral with short term upside bias as prices are likely to remain mired in a range for the foreseeable future.
Currently asset classes are mostly higher as shown in the EMI Price Board table below.
Best Regards,
Dominick A. Chirichella
Energy Market Analysis is published daily by the Energy Management Institute 1324 Lexington Avenue, # 322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.
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