Quote of the Day
Success doesn't come to you...you go to it.
The Greek Prime Minister won his confidence vote last night but so far today the markets have been mostly negative as we may be in a sell the fact type mode at the moment. Most all market participants were expecting a favorable vote...which they got... and as such most of the reaction from the expected positive vote was already priced into most risk asset classes over the last several days. In addition the confidence vote was step one in the process as a new round of austerity measures have to also be passed by the parliament and then the final structure of the bailout plan has to be completed assuming the austerity measures pass. There is widespread discontent in Greece over the results in Parliament so far and it is likely to spread even deeper if more austerity measures are approved. The Greek tragedy is far from over and now the market is once again looking at the rest of the southern EU member states like Spain as their situation does not look like it is getting any better. Although I still expect the Greek bailout plan to be eventually approved and implemented it is yet another stop gap measure in the EU that is resulting in the sovereign debt issues not going away but rather just setting up for additional problems in the medium term.
As I mentioned yesterday what has been going on in the risk asset markets (including oil) has been mostly a relief or short covering rally rather than any major structural change in the markets simply because Greece will get a new bailout program. The underlying risk in the oil complex is still emanating from the slowing economy that is more than likely to result in an underperformance in oil demand growth and a likely over performance on the supply side of the equation. In the emerging market world inflation fighting is still the main strategy of the Central Banks in that region of the world and it will result in a continuation of intentional slowing of their economies which in fact are the main growth engines of the oil world as over 80% of oil demand growth has been coming from the developing world. Overnight the Chinese government predicted inflation is likely to rise again in June after flooding damaged crops and pushed up food costs. The current estimates coming from the government is overall price increases in June will be higher than in May. All signs point to further tightening by the government which will eventually slow the economy as well as oil demand growth.
Further overhanging the oil complex today is the anticipated outcome of the US Federal Reserve FOMC meeting at 2:15 PM EST followed by Chairman Bernanke's second press conference. The market is expecting status quo with no mention of a new round of quantitative easing after QE2 expires at the end of this month. The market is already anticipating that Bernanke will discuss the slowing of the US economy and that unto itself is likely to cast a dark shadow on today's trading...especially if the market is convinced that there is not much of a short term solution to the problem. Again a negative for oil prices supporting the underperformance on the demand side.
On the equity front global equity markets did gain ground over the last 24 hours but the momentum is starting to turn in the opposite direction in European markets as shown in the EMI Global Equity Index table below. The Index is currently higher by 1% on the week resulting in a narrowing of the year to date loss to 6.2%. Seven of the ten bourses in the Index remain in negative territory for 2011 with US Dow still in the lead while Brazil's market continues to solidly hold the bottom spot with the largest year to date loss. The equity markets have been mostly a positive for oil prices this week as values have gained ground. But like most every other risk asset class this market segment has moved higher mostly on short covering and not based on any positive structural change in the market. In fact as of this writing most European bourses are trading lower while equity futures markets in the US are all pointing to a lower opening on Wall Street this morning.
On the oil fundamental front last night's API report was mixed and biased to the bearish side for crude oil while being marginally positive for refined products. The API showed a much smaller than expected decline in crude oil inventories, a modest draw in distillate stocks and gasoline inventories but a surprisingly large increase in refinery utilization rates...indicating more refined products are on the way. Distillate fuel inventories resumed their decline (after a one week build) indicating that the market may not yet be ready to return to a more normal building season for HO / diesel fuel.
The API reported a crude oil inventory draw of only about 81,000 barrels even as refinery utilization rates increased strongly by 2.0% to 86.5% of capacity while imports increased only modestly. The API reported a large build in crude oil stocks in PADD 2 of about 1.7 million barrels and a 0.7 million barrel build at Cushing, Ok. Crude oil stocks in the mid-west are still high but even with this week's build they are still around the level they were at back in February of this year. They showed a draw in inventory for distillate fuel and gasoline stocks. 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 1.5 million barrels while distillate fuel stocks were lower by about 0.5 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. If today’s EIA report is in sync with the API report I would view it as mildly bearish especially for crude oil and it could result in some additional selling coming into the market.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report with a modest decline in crude oil stocks as a result of another week of reduced imports and a small increase in refinery utilization rates. I am expecting a modest build in both gasoline inventories and distillate fuel stocks. 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 move into a small deficit of about 0.9 million barrels while the overhang versus the five year average for the same week will also narrow to 20.8 million barrels. My projection risk for crude oil is to the upside as stocks could have actually built depending on the combination of how much additional crude oil came through the Keystone pipeline versus the level of refinery runs in PADD2.
If the inventories are in line with the projections I would expect to see another decline in both PADD 2 and Cushing crude oil stock levels which would potentially impact the Brent/ WTI spread. Since peaking around June 15th the spread has narrowed by about $4.50/bbl. As I discussed in last week's newsletter I expect the spread to continue to narrow. With the WTI contango not very economical for storing oil and with US refiners gradually increasing refinery utilization rates... inventories in this region are looking like they are entering a destocking pattern. PADD 2 stocks are now back down to earlier year levels when the spread was trading in a range of $12 to $14/bbl premium to Brent. If stocks continue to decline I would expect the low double digit level as the next target for the spread during what looks like the correction phase.
With refinery runs expected to increase by about 0.2% 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 1.0 million barrels which would result in the gasoline year over year deficit narrowing to about 1.5 million barrels while the surplus versus the five year average for the same week will widen to about 7.2 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 fifth week in a row.
Distillate fuel is projected to increase modestly by 0.5 million barrels on a combination of no weather demand as well as an increase in production. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 15.6 million barrels below last year while the overhang versus the five year average will be around 6.2 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 builds in inventories for everything other than gasoline stocks versus this week's projected mixed report. In fact the builds last year are much greater than this week's projections so in general the fundamentals may gain some ground versus last year for the second week in a row.
As usual do not overreact to the API data 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 to bearish. 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 as well as the economic outlook coming out of today's FOMC meeting.
My individual market view is detailed in the table at the beginning of the newsletter. For today I am moving my bias back to cautiously bearish but I think there are more indications that expose the market to a period of choppy trading but with a downside exposure. Technically the market remains below key technical support levels indicating a potential for lower prices in the short term. We remain in a high risk/low reward environment for flat price trading in the short term.
I am moving my Nat Gas view and bias to back to neutral as prices hover near the key technical resistance level of $4.40/mmbtu.
Currently most risk asset classes are lower as shown in the following table.
Dominick A. Chirichella
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