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We are drowning in information but starved for knowledge.
John Naisbitt
Crude oil prices surged higher to start this shortened trading week on a combination of short covering and catch up from last week's strong gains in the financial markets as well as a new round of buying by the funds as they set-up their books for the second half of the year. That all said I think the moves in prices this week are already overdone as there is little support to justify the move on Tuesday. As I warned in yesterday's newsletter I thought there was a possibility that the market may begin to trade on the perception view that the global economy would recover at a faster pace than it did during the first half of the year. I have to conclude that based on yesterday trading pattern that there aforementioned mentality is starting to set into the market sentiment.
I must admit I am not yet a believer of this view as I would like to see a lot more supporting macroeconomic data to substantiate this view. A major piece of data will hit the media airwaves on Friday when the US Labor Department will release the latest non-farm payroll data for the month of June. After a very disappointing number last month the market is expecting a gain of 80,000 new jobs with the unemployment rate holding steady at 9.1%. This would be a marginal improvement over last month's 54,000 new jobs but still well below the level that is needed in the US to just keep up with new entrants into the market. I must admit if the actual jobs report is in sync with the expectations it does not suggest to me that economic growth in the US is accelerating by any means.
Although oil prices gained ground on Tuesday they did not get much support from the equity and currency markets as global equities were mostly lower while the US dollar was stronger (although it is now heading lower as of this writing). So far the global equity markets lost about 0.5% on the week as shown in the EMI Global Equity Index table below. The Index is now down by 3.4% for the year with six of the ten bourses in the Index still in negative territory. The US Dow is still holding the top spot with Brazil at the bottom of the list with a 9% year to date loss. For the moment both equities and the USD are not supportive for oil prices as well as the broader commodity complex.
With the markets continuing to look 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 it is difficult to say when this week's report will impact the market (if at all). The normal weekly reports get underway late Wednesday afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Thursday morning. 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 2.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will continue to hover around 0.7 million barrels while the overhang versus the five year average for the same week will narrow to 20.0 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 a 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 almost $7/bbl (partly a result of the IEA oil release announcement). As I discussed in last week's newsletter I expect the spread to continue to narrow. 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 0.1% 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 coming in around 5.3 million barrels while the surplus versus the five year average for the same week will narrow to about 5.3 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 sixth week in a row and heading into a long holiday weekend in the US.
Distillate fuel is projected to increase modestly by 1.0 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 16.4 million barrels below last year while the overhang versus the five year average will be around 4.6 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 experienced a similar change in inventories as what I am expecting this week. As such I do not expect much of a change in the year over year status if the actual numbers are in line with my projections.
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 mostly neutral. 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.
For today I am maintaining my oil bias at neutral. I still think there are more indications that expose the market to a period of choppy trading. Also as mentioned above I have not bought into the surge in prices that has occurred so far this week as the externals are a negative and the fundamentals do not currently justify prices at the current level.
I am maintaining my Nat Gas view and bias as neutral.
Currently most risk asset classes are higher as shown in the following table.
Best regards
Dominick A. Chirichella
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