Quote of the Day
Earth laughs in flowers.
Ralph Waldo Emerson
Oil prices continued to gain ground on Tuesday on a combination of additional short covering, an increase in China's crude oil imports by 3% for April, and concerns over the Mississippi flood possibly reaching the Gulf Coast and impacting refineries in that region (especially Louisiana). WTI has now regained about $9/bbl after hitting an intraday day low of $94.50/bbl last Thursday...also a key technical support level. The US dollar short covering rally seems to be losing some of its steam and as such the selling pressure from last week is starting to look like it may be over for the moment.
Overnight China released it latest on inflation. The CPI came in at 5.3% (versus an expectation of 5.2%) or a mild slowing for the month of April suggesting that this meteoritic economy may be finally starting to see some impact from the aggressive tightening that has been underway by the Chinese government for about a year. On the other side of the equation wholesale inflation as measured by the PPI came in at 6.8% versus an expectation of 7.3%. So on both accounts better than expected and enough to possibly indicate that China could be heading for a soft landing. For now the news out of China has been viewed by the market as the Chinese government may not ratchet up its inflation fighting and as such China's economy is likely to still grow at a decent pace keeping their voracious appetite for oil and other commodities in place.
Last night the API released their weekly oil inventory report which I would view as biased to the bearish side...except for gasoline. They reported a build of 2.9 million barrels of crude oil, a build of about 0.6 million barrels of distillate fuel and a surprise draw of about 1.8 million barrels of gasoline. At the moment the market is not reacting to the API report as the more widely followed EIA report will hit the media airwaves in a few hours. I am projecting the following for oil stocks for this week:
- Crude oil a build of 1.1 million barrels
- Gasoline a draw of 0.5 million barrels
- Distillate fuel a build of 1.2 million barrels
- Refinery runs increased by 0.3%
If my projections are in sync with the actual results I would expect the market to view the outcome of the reports with a downside bias. Of note last week there was a very large build in total commercial stocks beyond simply adding up the combination of crude oil, gasoline and distillate fuel suggesting a buildup in intermediate of unfinished products. If that was the case the risk to this week’s EIA oil inventory report could be a larger than projected build in finished products and one that would result in the report turning out to be a bit more bearish than it is projected to be.
The Nat Gas market was not overly impacted by the outcome of the EIA Short Term Energy Outlook yesterday even now that the weather has become less of a factor on Nat Gas prices and the shoulder season is finally in full swing. The market is looking for guidance for its next move. I am still expecting the Nat Gas market to test the $4/mmbtu technical support level before making any major run back to the upside. The latest weather forecast out of NOAA is still a neutral of Nat Gas prices.
Thursday the EIA will release their latest Nat Gas injection report. I am expecting:
- A net injection into inventory of 95 BCF
- Versus an injection last year of 93 BCF
- ·an injection of 90 BCF for the five-year average for the same week.
Overall I am expecting this week’s Nat Gas inventory report to be mostly neutral.
The EIA released the Short Term Energy Outlook yesterday. It was a neutral for the market in that they did lower their forecast for oil consumption for 2011, but by only about 100,000 barrels while increasing their forecast for 2012. Following are the main highlights for both oil and Nat Gas. The Nat Gas consumption forecast is projected to increase by 0.5% for 2011...again another neutral.
Crude Oil and Liquid Fuels Overview. EIA projects that total world oil consumption will grow by 1.4 million barrels per day (bbl/d) in 2011, which is about 0.1 million bbl/d lower than last month's Outlook, and 1.6 million bbl/d in 2012, slightly higher than forecast last month. Supply from non‐OPEC countries increases by an average of about 0.6 million bbl/d annually through 2012, which is about 0.2 million bbl/d higher than in last month's Outlook. OECD inventory reports for the first quarter 2011 have come in higher than EIA projected in last month's Outlook. Consequently, while EIA still expects the market will rely on both a drawdown of inventories and increases in the production of crude oil and non‐crude liquids in OPEC member countries to meet projected demand growth, the forecast for OPEC crude oil and liquid fuels production has been lowered from last month's Outlook by about 0.14 million bbl/d in 2011 and 0.5 million bbl/d in 2012.
Among the major uncertainties that could push oil prices above or below our current forecast are: Continued unrest in producing countries and its potential impact on supply; decisions by key OPEC-member countries regarding their production in response to the global increase in oil demand; the rate of economic growth, 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 to 86.7 million bbl/d in 2010, surpassing the previous record of 86.3 million bbl/d set in 2007. EIA expects that world liquid fuels consumption will grow by 1.4 million bbl/d in 2011, followed by 1.6 million bbl/d growth in 2012, resulting in total world consumption of 89.7 million bbl/d in 2012. Countries outside the Organization for Economic Cooperation and Development (OECD) will make up almost all of the growth in consumption over the next two years, with the largest increases coming from China, Brazil, and the Middle East. EIA expects that, among the OECD nations, only the United States and Canada will show growth in oil consumption over the next two years, offsetting declines in OECD Europe and Japan.
OPEC Supply. Forecast OPEC crude oil production declines in 2011, falling by about 450,000 bbl/d, followed by an increase of 640,000 bbl/d in 2012. EIA assumes that about one-half of Libya's pre-disruption production will resume by the end of 2012. EIA projects that OPEC surplus capacity will fall from 3.9 million bbl/d at the end of 2010 to 3.6 million bbl/d at the end of 2011, followed by a further decline to 3.1 million bbl/d by the end of 2012. Forecast OPEC non‐crude liquids production increases by 0.8 million bbl/d in 2011 and by 0.4 million bbl/d in 2012.
OECD Petroleum Inventories. EIA expects that OECD onshore inventories will decline in 2011 following the steep drop in floating storage that has already occurred. Projected onshore OECD stocks fall by about 20 million barrels in 2011, followed by an additional 54 million barrel decline in 2012. Days of supply (total inventories divided by average daily consumption) drops from a relatively high 58.1 days during the fourth quarter of 2010 to 57.0 days in the fourth quarter 2011, and 55.7 days of supply in the fourth quarter 2012.
U.S. Liquid Fuels Consumption. Total consumption of 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 140,000 bbl/d (0.7 percent) in 2011, and by a further 170,000 bbl/d (0.9 percent), to 19.5 million bbl/d, in 2012, which is still well below the record-high 20.8 million bbl/d in 2005.
In 2011, forecast distillate fuel consumption growth of almost 80,000 bbl/d (2.1 percent) accounts for over half of the forecast increase in liquid fuels consumption, while forecast growth in gasoline and jet fuel grow by just 16,000 bbl/d (0.2 percent) and 13,000 bbl/d (0.9 percent), respectively. In 2012 motor gasoline consumption rises by 75,000 bbl/d (0.8 percent), the highest growth rate since 2006, driven by growing population, rising employment, and rising income. Jet fuel consumption increases 23,000 bbl/d (1.6 percent) in 2012. In contrast, distillate fuel consumption growth moderates slightly to 66,000 bbl/d (1.7 percent) in 2012 as industrial output grows more slowly than in 2011.
U.S. Natural Gas Consumption. EIA expects total natural gas consumption to grow by 0.5 percent to 66.5 billion cubic feet per day (Bcf/d) in 2011. Forecast industrial consumption rises 1.9 percent to 18.4 Bcf/d in 2011, and electric power consumption rises 0.4 percent to 20.3 Bcf/d.
Projected total consumption increases by 0.7 percent in 2012 to 67.0 Bcf/d. Growth continues in the industrial and electric power sectors at 1.4 percent and 2.6 percent, respectively. Residential and commercial consumption each decline by 1.6 percent in 2012 stemming from forecast 2.2 percent reduction in natural gas-weighted heating degree-days.
U.S. Natural Gas Production and Imports. Marketed natural gas production has been growing steadily since 2005, primarily because of the boom in horizontal drilling in unconventional shale formations. EIA expects total marketed production to average 1.4 Bcf/d (2.3 percent) higher in 2011 compared with last year. Marketed natural gas production fell by 1.1 Bcf/d in February 2011 from the month before, but this drop can largely be attributed to temporary factors including seasonal maintenance in the GOM and colder-than-normal weather in Texas, New Mexico, Oklahoma, and Wyoming which caused freeze-offs (gas flow blockages resulting from water vapor freezing in the gas stream), forcing temporary shut downs to lower-48 onshore production. EIA expects production will recover from February levels but begin modest month-to-month declines that could continue through the year because of reductions in the number of active natural gas drilling rigs.
U.S. Natural Gas Inventories. On April 29, 2011, working natural gas in storage stood at 1,757 Bcf, which is 226 Bcf below last year's level in late April. Cold temperatures and production freeze-offs in January and February contributed to relatively large draws on inventories early in the year. EIA expects that inventories, though lower than last year, will remain robust given higher forecast production throughout the 2011 injection season. Projected inventories near 3.9 Tcf at the end of October 2011 because of high production levels and a mild summer relative to last year.
My individual market view is detailed in the table at the beginning of the newsletter. I am still not sure how to suggest where the market is heading in the short term as the market is still in the emotional phase and anything out of the norm will result in an above average move in the short term. For the short term I am moving everything to neutral as I think we are close to a bottom in the current sell-off...especially if this week's fundamental and economic data is not very damaging. Longer term I still expect higher prices. Over the last twenty four hours there are more signs that the commodities rout may be over and it is time to once again start to reload from the long side. I will remain sidelined until I see how the market digests today inventories and the evolving flood situation.
I am maintaining my Nat Gas view at cautiously bearish but moving my bias back to neutral until I see how Nat Gas reacts to everything going on in the rest of the energy and commodity complex.
Currently asset classes are mixed as shown in the EMI Price Board table below.
Dominick A. Chirichella
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