Quote of the Day
You cannot be friends upon any other terms than upon the terms of equality.
Woodrow Wilson
After a very choppy trading session on Tuesday prices in the oil complex are mostly lower ahead of the outcome of today's OPEC meeting. The focus in the market is OPEC will most likely raise only the production quotas but not actually production. The OPEC 10 (excludes Iraq who still does not fall under the OPEC production quota) target has been 24.84 million barrels per day. Basis the May EIA STEO report as well as other estimates the OPEC 10 produced 26.63 million barrels per day in May. A pre-meeting (yesterday) OPEC committee recommended that OPEC increase the target by 1 million barrels per day which would not even completely legitimize the current OPEC production level. I would consider such an outcome as a neutral for oil as no additional oil is likely to flow into the market at this time. This still seems a possible outcome for OPEC as several headlines heading into the meeting today continue to indicate that OPEC members think that the oil market remains well supplied.
However, there could be a surprise coming from the meeting as Saudi Arabia is still saying they would rather see an increase in supply rather than OPEC's production targets. Saudi Arabia wants any increase to come on top of the current production level which would put more oil into the market and would be a bearish outcome. Normally the Saudi's win out in most all OPEC meetings and if the above is in fact the view of the Saudi delegation then new oil will be flowing into the market ...possibly not immediately but it will set the stage for more oil to flow in the second half when the IEA and other consumer agencies are projecting a need for additional barrels as the call on OPEC crude is expected to increase. For the moment it is not a slam dunk as to what the outcome will turn out to be so watch and listen carefully as this is setting up to definitely be a market mover today. The way oil is trading at the moment (down across the board) I would say the market is expecting an outcome that may be more in line with the aforementioned Saudi view (follow my Twitter comments as I will be commenting on the outcome throughout the day @dacenergy).
The EIA released their latest Short Term Energy Outlook (STEO) report yesterday afternoon. Not much to move the market in either direction as the EIA has not made any adjustments to their projections based on the poor economic data of late. In fact they did increase their projection for global oil consumption for 2011 by about 300,000 bpd versus the previous month's forecast due to higher oil related power generation in China, Japan and the Middle East. The report was basically neutral to biased to the bullish side in that consumption was not reduced. That said I think when the dust settles the EIA projection for oil consumption will turn out to be overstated. Following are the main oil related highlights from the report.
Crude Oil and Liquid Fuels Overview. EIA projects that total world oil consumption will grow by 1.7 million barrels per day (bbl/d) in 2011, which is about 0.3 million bbl/d higher than last month's Outlook, primarily because of higher forecasts of consumption for electricity generation in China, Japan, and the Middle East. Projected world consumption increases by 1.6 million bbl/d in 2012, unchanged from last month's Outlook. Projected supply from non-OPEC countries increases by an average of about 0.6 million bbl/d in 2011 and 0.5 million bbl/d in 2012.
EIA expects that the market will rely on both a drawdown of inventories and increases in production from both OPEC and non-OPEC countries to meet projected demand growth. While OPEC crude oil production declines 0.4 million bbl/d in 2011 because of the disruption forecast to Libyan production, OPEC non-crude liquids production grows by 0.6 million bbl/d. EIA expects the world crude oil market will continue to tighten in 2012, with forecast OPEC crude oil production increasing by 0.7 million bbl/d and OPEC non-crude production growing by 0.4 million bbl/d.
Among the major uncertainties that could push crude 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. EIA expects that world liquid fuels consumption, which reached a record level of 86.7 million barrels per day in 2010, will grow by 1.7 million bbl/d in 2011 and by an additional 1.6 million bbl/d in 2012, resulting in total world consumption of 90.0 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. Forecasts of 2011 consumption in China, Japan, and the Middle East were raised by 120 thousand bbl/d, 80 thousand bbl/d, and 110 thousand bbl/d, respectively, from last month's Outlook because of higher expected demand for petroleum-fueled electric power generation. EIA now expects consumption in China to increase by 700 thousand bbl/d in 2011.
Non-OPEC Supply. EIA projects that non-OPEC crude oil and liquid fuels production will increase by 590,000 bbl/d in 2011 and by 490 thousand bbl/d in 2012. The greatest increases in non-OPEC oil production during 2011 occur in Brazil (130,000 bbl/d), Canada (170 thousand bbl/d), China (140 thousand bbl/d), Colombia (110 thousand bbl/d) and countries that were formerly part of the Soviet Union (210 thousand bbl/d). In 2012, EIA expects production growth to remain strong in Canada, China, Brazil, and Colombia, but forecast production growth in the former Soviet Union countries slows to 80,000 bbl/d. Other non-OPEC areas are expected to decline, including a decrease in North Sea production of 110,000 bbl/d in 2011 and a further decrease of 200 thousand bbl/d in 2012.
OPEC Supply. Forecast OPEC crude oil production declines by 370,000 bbl/d in 2011, followed by an increase of 660 thousand bbl/d in 2012. EIA assumes that about one-half of Libya's pre-disruption production will resume by the end of 2012. Estimated OPEC crude oil production during the first quarter of 2011 averaged almost 30 million bbl/d. EIA projects that OPEC surplus capacity will fall from 4.0 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. Estimated OPEC production of non-crude liquids totals 6.0 and 6.4 million bbl/d in 2011 and 2012, respectively.
OECD Petroleum Inventories. EIA expects that OECD inventories will decline in 2011 following the steep drop in floating storage that has already occurred. Projected onshore OECD stocks fall by about 120 million barrels in 2011, followed by an additional 110 million-barrel decline in 2012. Days of supply (total inventories divided by average daily consumption) drops from a relatively high 57.9 days during the fourth quarter of 2010 to 54.6 days in the fourth quarter of 2011, and 52.4 days of supply in the fourth quarter of 2012.
U.S. Liquid Fuels Consumption. Total consumption of liquid fuels increased by 270,000 bbl/d (1.4 percent) during the first quarter 2011 over the same period the year before. Consumption growth during the first quarter was led by distillate fuel oil (160,000 bbl/d) and liquefied petroleum gas (70 thousand bbl/d). Motor gasoline consumption fell by 50,000 bbl/d. Consumption growth is expected to slow over the forecast. Projected total U.S. liquid fuels consumption increases by an average 150 thousand bbl/d (0.8 percent) in 2011, and by a further 130 thousand bbl/d (0.7 percent), to 19.4 million bbl/d in 2012, which is still well below the record-high 20.8 million bbl/d in 2005. Distillate fuel, buoyed by continued increases in industrial production, accounts for two thirds of the projected increase in liquid fuels consumption in 2011. Motor gasoline is the fastest growing consumption category in 2012, reflecting growing population, rising employment and income, and a predicted end to the recent steep run-up in retail gasoline prices.
In addition to the SEO report the EIA also weighed in on their expectations from the projected hurricane season and its impact on energy production in the Gulf of Mexico. The EIA estimates the season will shut in about 53 BCF of Nat Gas in the GOM which is less than a day's supply...certainly not a very bullish forecast and about 19 million barrels of oil...also about a day's supply. That said this is extremely hard to estimate until the hurricanes actually materialize and possibly hit the NG region of the GOM. Some of the highlights from this report follow.
The National Oceanic and Atmospheric Administration’s (NOAA) Atlantic Hurricane Season Outlook, released on May 19, 2011, predicts that the Atlantic basin likely will experience above‐normal tropical weather activity during this year’s hurricane season (June 1 – November 30).1 NOAA projects that 12 to 18 named storms will form within the Atlantic Basin over the next 6 months, including 6 to 10 hurricanes of which 3 to 6 will be intense.2
- Based on the results of a simulation using the NOAA predictions for the level of hurricane activity, EIA estimates that median outcomes for shut‐in production in the Federally‐administered Gulf of Mexico as a result of disruptions during the 2011 hurricane season are 19 million barrels (bbls) of crude oil and 53 billion cubic feet (Bcf) of natural gas.
- Projections of shut‐in production are highly uncertain. For example, there is a 70‐percent probability that shut‐in offshore production for the entire season will fall between 3.2 and 53.5 million bbls of crude oil and between 6.5 and 162 Bcf of natural gas. Intervals with a higher likelihood of encompassing the actual level of shut‐in production would be even wider.
- EIA’s simulation results indicate an 80‐percent probability of offshore crude oil or natural gas production experiencing outages during the upcoming hurricane season that are equal to or larger than the production shut in during the 2010 hurricane season (about 4.3 million bbls of crude oil and 8.5 Bcf of natural gas).
The API report was mixed but biased to the bullish side on a much larger than expected decline in crude oil inventories and a modest draw in gasoline stocks. Distillate fuel inventories built for the first time this season and could indicate that the normal building season for HO % diesel fuel is finally underway. The API reported a crude oil inventory draw of about 5.5 million barrels as refinery utilization rates increased by 0.7% to 84.7% of capacity and imports declined strongly. The API reported a big draw in crude oil stocks in PADD 2 of about 2.6 million barrels as there have been ongoing pipeline problems feeding this region of the US. They showed a build in inventory for distillate fuel and a surprisingly modest decline in gasoline stocks in even after the long holiday weekend came and went in the US. The market was expecting a modest build in gasoline stocks and a modest build in distillate fuel inventories this week. On the week gasoline stocks decreased by about 0.4 million barrels while distillate fuel stocks were higher by about 1.8 million barrels. The results of the API report are summarized in the following table. So far the market is not reacting much to the API report as the industry awaits the EIA report later this morning as well as the outcome of the OPEC meeting today. If today’s EIA report is in sync with the API report I would view it as mildly bullish especially for crude oil and gasoline and it could result in some support coming into the market.
With the markets looking for oil price direction we may see the weekly inventory reports have a directional impact yet again this week. At the moment with all of the financial uncertainty permeating around the global markets and with an OPEC meeting tomorrow it is difficult to say when this week's report will impact the market (if at all). The more widely watched EIA data will be released this morning at 10:30 AM (EST). My projections for this week’s inventory reports are summarized in the following table. I am expecting mixed report with a modest decline in crude oil stocks as a result of an increase in refinery utilization rates. I am even expecting a modest build in both gasoline inventories and distillate fuel stocks. I am expecting crude oil stocks to decline 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 to around 11.4 million barrels while the overhang versus the five year average for the same week will widen to 30 million barrels.
With refinery runs expected to increase by about 0.3% I am expecting a modest build in gasoline stocks as demand likely decreased while imports possibly increased. Gasoline stocks are expected to build by about 0.8 million barrels which would result in the gasoline year over year deficit narrowing to about 5.9 million barrels while the surplus versus the five year average for the same week will widen to about 4.6 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 third week in a row. Gasoline demand is definitely on the defensive even as last week's implied demand number increased marginally as retailers got ready for the long holiday weekend in the US.
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 14.2 million barrels below last year while the overhang versus the five year average will be around 8.3 million barrels.
The following table compares my projections for this week's report (for the categories I am making projections) with the change in inventories for the same period last year. As you can see from the table last year saw across the board declines in inventories for everything other than distillate fuel versus this week's projected mixed report. In fact the declines last year are much greater than this week's projections so in general the fundamentals are going to lose ground versus last year. Of interest last year's changes in inventories were more in line with last night's outcome from the API report than the current projections.
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 projection I would expect the market to view the results as biased to the bullish side. 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 outcome of the OPEC meeting.
My individual market view is detailed in the table at the beginning of the newsletter. For today I remaining neutral for my oil view and bias until the OPEC meeting and weekly inventories are digested. The oil complex is very choppy as the poor economic data is trying to push prices lower but the falling USD and loading problems in the North Sea are still offsetting the negativism coming from the macroeconomic data while today's OPEC meeting is creating an added level of volatility.
I am keeping my Nat Gas view at neutral and my bias at cautiously bullish. The market has broken out of its technical breakout with the $4.70 to $4.71/mmbtu level now a new support level. If one does go outright long and the market does move higher (as it did yesterday) you should trail the aforementioned stops upward with the market move.
Currently asset classes are lower as shown in the following table.
Best regards
Dominick A. Chirichella
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