Quote of the Day
Winners make it happen, losers let it happen, traders buy and sell before it happens.
Once the Goldman Sachs bullish recommendations hit the market oil prices (and many other commodity prices) moved into positive territory and stayed there throughout the trading session on Tuesday although they came very close to moving into negative territory at one point about mid-day. Beyond that the market moved almost tick for tick at times with the direction of the U.S. dollar. The U.S. Dollar Index retraced a bit yesterday adding a bit of fuel to the oil fire and keeping prices supported. One by one the Wall Street companies like GS, JPM, MS and now Barclays have all came out with bullish forecasts for oil prices. Whether or not all of the bullish recommendations will be enough to put a floor on prices in the short term is still a bit of a wildcard. The main drivers of oil is the strength of the global economy and the resultant impact on global equities have been biased to the bearish side for oil while the direction of the U.S. dollar has been mostly upward after bottoming out early in the month and has also been mostly negative for oil.
On the geopolitical front the fighting rages on in Libya as the country is obviously in the midst of a civil war. There are no indications that the end is near or that a diplomatic solution to a Gaddafi exit is at hand but NATO and the west are ramping up the attacks which should bring added pressure on Gaddafi and his supporters. In addition Libya's main source of revenue is oil sales and at the moment they are mostly nonexistent. The rebels are starting to get aid from the west while Gaddafi and his supporters are not exporting oil nor receiving any oil revenue. Eventually that has to impact the masses who support Gaddafi as the combination of a lack of revenue as well as the impact of massive sanctions on Libya have to get the supporters of Gaddafi starting to recognize they chose the wrong side. I still think a diplomatic solution is possible and as such the biggest risk surrounding Libya is a Gaddafi exit which would result in a $5 to $10/bb move lower for the price of oil (relatively quickly if it happens).
So far this morning oil is back on the defensive as the U.S. dollar is back in positive territory pushing oil prices lower while last night's modestly bearish API oil inventory report (see below for more details) is adding further support to the oil bears. The USD is continuing to be driven by the growing concerns over the evolving sovereign debt crisis in Europe that not only does not seem to be going away rather it seems to be spreading deeper within the EU as evidenced by the downgrading of Belgium on Tuesday...a non PIIGS country. In addition a forecast for German consumer confidence is expected to fall next month which suggests that the ECB will not likely raise interest rates next month and put more pressure on the falling euro and thus be supportive for the USD and a negative for oil prices.
Global equities are not faring much better than oil so far this morning as shown in the EMI Global Equity Index table below. Over the last twenty four hours the Index did recover some of its week to date losses but that was mostly driven by one bourse...Brazil. In fact over the last twenty four hours only two of the ten burses in the Index have been able to add value. Overnight all of the main Asian bourses declined as the market sentiment continues to be impacted by a view that the main growth economic growth engines of the world ...Asia...are starting to show signs of slowing. On the European side the sovereign debt issues are having a negative impact on European equity markets while the snail's pace growth of the US economy is even starting to impact the number one equity market of 2011 (so far) as QE2 works its way toward an end in June. At the moment the Index is down by 0.4% for the week widening the year to date loss to 3.9%. All of the European bourses are trading lower while U.S. equity futures are pointing to a lower opening on Wall Street this morning. Needless to say global equities are also a negative for oil prices today.
The oil relief rally that was underway yesterday was derailed shortly after the API released their weekly oil inventory report late yesterday afternoon. The API report was mixed but mostly bearish on a big build in gasoline stocks. The API reported a crude oil inventory draw of about 0.9 million barrels as refinery utilization rates increased by 1.8% to 83.5% of capacity. The API reported a big decline in crude oil stocks in PADD 2 of about 1.4 million barrels or the second week in a row showing one of the largest weekly declines in over a year. They showed an expected decline in inventory for distillate fuel and a surprisingly large build in gasoline stocks. The market was expecting small builds in both gasoline and distillate fuel this week. On the week gasoline stocks decreased by about 2.4 million barrels while distillate fuel stocks were lower by about 0.8 million barrels. The results of the API report are summarized in the following table. So far the reaction to the API report has been bearish for RBOB and crude oil and modestly positive for HO. If Wednesday’s EIA report is in sync with the API report I would view it as mildly bearish especially for gasoline and it is likely to result in an extensions of the selling that is currently in place.
With the markets looking for oil price direction we may see the fundamentals have a directional impact yet again this week. At the moment with all of the financial uncertainty permeating around the global markets it is difficult to say when this week's report will impact the market. My projections for this week’s inventory reports are summarized in the following table. I am expecting mixed report with an across the board build in refined products and modest decline in crude oil stocks as a result of an increase in refinery utilization rates. I am even expecting the third weekly build in gasoline inventories in a row. I am expecting crude oil stocks to decline 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 around 3.9 million barrels while the overhang versus the five year average for the same week will narrow to 20.6 million barrels.
Even with refinery runs expected to increase by about 1% I am expecting a build in gasoline stocks as demand likely slipped and imports increased on the week. Gasoline stocks are expected to build by about 0.4 million barrels which would result in the gasoline year over year deficit hovering near the 15.3 million barrel mark while the deficit versus the five year average for the same week will widen to 3.0 million barrels. All eyes will be focused on the gasoline number once again this week after last week's surprise build in stocks for the second week in a row after steady declines for about three months. Gasoline demand is definitely on the defensive even as last week's implied demand number increased marginally as retailer get ready for the upcoming long holiday weekend in the US. Although oil prices have declined on the financial and futures side the average retail gasoline price in the US is still only about $0.17/gal below the psychological $4/gal that 62% of American consumers indicated that at this level they would cut back on their driving. So far they have and it is likely to continue. With falling demand and refiners raising refinery run rates after the maintenance season I would expect gasoline stocks to build for the next three or four weeks and thus catch the attention of the gasoline sellers.
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 weather forecasts are a neutral for heating oil especially for this time of the year. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 8.9 million barrels below last year while the overhang versus the five year average will be around 14.5 million barrels.
Net result the US continues to remain well supplied but the deficit versus last year for the main refined products is still mildly supportive but this could be changing if the destocking pattern that has been in place begins to change.
As usual do not overreact to the API data which will be released later today as more often than not it 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 versus last week. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets and the direction of the USD.
My individual market view is detailed in the table at the beginning of the newsletter. As I have been discussing the market is in a technical consolidation pattern with a low predictive level for the very short term time horizon. Prices remain within the technical triangular or consolidation pattern that has been in place for the last several weeks. The market is still in the emotional phase and currently mired in the wide trading range as I have been discussing for the last week or so. For the short term I am keeping my overall view at neutral and as wells as my bias at neutral until the market breakouts out of the triangular consolidation pattern.
I am maintaining my Nat Gas view at cautiously bearish but keeping my bias to neutral as I still expect Nat Gas prices to make an attempt to test the $4/mmbtu level in the foreseeable future.
Currently asset classes are mixed as shown in the following table. We are approaching a long holiday weekend in the US as well as the end of the month which will result in window dressing coming from the funds which could result in a bit of a short covering rally in risk asset classes before the week is out and into early next week.
Dominick A. Chirichella
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