Quote of the Day
Ability will never catch up with the demand for it.
Malcolm Forbes
I apologize for have to talk yet again about the lack of a deal in the US to solve the overspending habits that have resulted in the situation that exists at the moment. We are not winning the dueling proposal mode with both side seemingly still far apart and the President threatening to veto the House GOP bill. Not a pretty picture as the politicians seem to be primarily focused on the upcoming election in 2012 rather than coming up with a solution that is optimum for the American public...which I still view as being simple...spend less money that we do not have. All markets remain in a massive holding pattern and will likely trade in this pattern – with a downside bias – until something breaks and a deal is done. I still expect a deal to get done but not until the very last minute.
Global equity market are also feeling the impact as the EMI Global Equity Index is now negative for the week as shown in the following table below. The EMI Index has now lost 0.9% for the week widening the year to date loss to 6.3% and less than 1% above the lowest level for the year. There are now just three bourses out of the ten in the Index that are still in positive territory with one on the cusp of going negative (London). Equities are a negative for oil prices as well as the broader commodity complex.
On the oil fundamental front Tuesday afternoon's API report was mixed in my view with crude oil and distillate fuel strongly bearish while gasoline was mildly bullish. The API data was mostly outside of the market expectations showing a huge surprise build in crude oil inventories, an above expected build in distillate fuel stocks, a surprise decline in gasoline and a slightly larger than expected decline in run rates.
The API reported a crude oil inventory build of about 4.0 million barrels as refinery utilization rates declined by 0.3% to 85.8% of capacity. The API reported a draw of about 2.9 million barrels of crude oil in PADD 2 with the bulk of the build in PADD 3 as SPR oil starts to hit the market. Crude oil stocks in the mid-west are not as high as they once were and with this week's decrease they are around the level they were at back in the first quarter of this year. They showed a build in inventory for distillate fuel and a small draw in gasoline stocks. The market was expecting a small build in gasoline stocks and only a modest build in distillate fuel inventories this week. On the week gasoline stocks decreased by about 0.6 million barrels while distillate fuel stocks were higher by about 2.9 million barrels. The results of the API report are summarized in the following table. So far the market has reacted negatively to the API report...especially for crude oil... 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 modestly supportive.
At the moment with all of the financial uncertainty permeating around the global markets it is difficult to say if 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 a mixed report with a modest decline in crude oil stocks as a result of another week of reduced imports even with a small decrease 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 1.0 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will widen to about 10.0 million barrels but the overhang versus the five year average for the same week will narrow to 14.3 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 oil came into the US versus the level of refinery runs in PADD2 and PADD3.
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 could potentially impact the Brent/WTI spread. Since peaking and setting another new record high two weeks ago the spread has narrowed about 15% since then but is still trading at an atypically high level of about $18.50/bbl premium to Brent. As I have discussed over the last month or so I still expect the spread to narrow but not until North Sea oil production returns to more normal levels after the August turnaround season is over. However, with US refiners gradually increasing refinery utilization rates... inventories in this region are looking like they could be 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 will be a correction phase when it finally begins (not likely until early fall or sooner if a resolution emerges in Libya before that).
With refinery runs expected to decrease by about 0.1% I am still expecting a modest build in gasoline stocks as demand likely decreased while imports possibly increased. Gasoline stocks are expected to build by about 0.3 million barrels which would result in the gasoline year over year deficit coming in around 9.5 million barrels while the surplus versus the five year average for the same week will widen to about 3.9 million barrels. All eyes will be focused on the gasoline number once again this week after last week's surprise decline in stocks for only the second time in months.
Distillate fuel is projected to increase modestly by 1.5 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 17.6 million barrels below last year while the overhang versus the five year average will be around 6.0 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 an across the board build in stocks so based on my projections the comparison to last year will deteriorate a tad in that this year's level will lose ground versus the same week last year. As such I do expect a noticeable 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.
All of the above said for today I am maintaining my oil view at neutral and also keeping my bias at neutral as the US deficit news is unpredictable on an hour to hour basis. Unfortunately I am seeing uncertainty overtaking the market once again and as such the sidelines are optimum until concrete news emerges about a US debt deal.
I am maintaining my Nat Gas view at neutral and keeping my bias at neutral. The market is certainly becoming less interesting from a long perspective at the moment as last week's EIA inventory was considered to be bearish by the market. Also, the technicals are disappointing and moving me solidly back to the sidelines for the moment. That all said it is hot and power generation demand is soaring at the moment. As long as the heat wave remains in place I do not expect any significant sell-off in Nat Gas prices.
Currently most risk asset classes are mostly lower as shown in the following table.
Best regards,
Dominick A. Chirichella
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