Quote of the Day
When a friend is in trouble, don't annoy him by asking if there is anything you can do. Think up something appropriate and do it.
Edgar Howe
Tuesday's trading action was a continuation of Monday as well as most of last week...selling dominated the activity throughout the entire session as the US debt bill was signed, sealed and delivered. The ending of the debt debacle had no positive impact on the markets except for a very short period of time on Sunday night when the markets just opened for the week. The way the markets have traded post debt deal suggest strongly to me that the majority of the selling last week was more to do with the faltering global economy rather than uncertainty over the US politicians doing a deal. If last week's selling was mostly debt related (which many thought) the relief rally would have lasted a lot longer than a couple of hours and likely both equities and commodities would still be rising. Since they are not the market is telling us it was really focused on the economy all of the time with the debt talks just detracting attention a bit.
Oil prices are now down for the third day in a row or the longest stretch of down days since back in May also suggesting that the bears are starting to retake control of the market and buying dips is not the mode to be in. Rather we seem to be approaching a sell any rally mode based on trading activity this week so far. Oil is technically weak, fundamentally weak and it has no support from the external markets as they are all weak and suggesting that the global economy will slow even further. For oil the single biggest headwind is the global slowdown in manufacturing. This is an energy intensive sector and will likely result in a slowing of global oil demand growth and thus a consistent restocking of global inventories. Unfortunately there is nothing encouraging in the macroeconomic data front that suggests the slowing is more representative of the past and better or more accelerated growth is coming.
From a technical perspective WTI closed below the $94/bbl support level and now has a clear path to test the June lows of $90/bbl barring something bullish in the short term. As shown in the following chart of the Sep Nymex WTI contract the market has been pretty much in a downtrend since peaking back in late April with a more clearly defined downward move coming into play since about early May. At the moment unless oil gets some support from the economic data or the fundamentals I would say the probability of oil heading down to the $90/bbl level is gaining momentum.
The API reported a surprise crude oil inventory draw of about 3.3 million barrels as refinery utilization rates surged by 0.9% to 86.7% of capacity. The API reported a draw of about 1.4 million barrels of crude oil in PADD 2 with a draw also in PADD 3 even as SPR oil continues to hit the market. Crude oil stocks in the mid-west are not as high as they once were and with this week's increase 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 larger than expected build 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 increased by about 2.5 million barrels while distillate fuel stocks were higher by about 1.4 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.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a modestly bearish report with an across the board build in oil stocks. I am expecting a modest build in crude oil stocks as a result oil flowing into the market from the SPR release and even with 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 build by about 1.6 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 2.4 million barrels but the overhang versus the five year average for the same week will widen to 20.2 million barrels. My projection risk for crude oil is to the upside as stocks could have actually built more strongly depending on the combination of how much additional oil came from the SPR versus the level of refinery runs in PADD2 and PADD3.
If the inventories are in line with the projections I would expect to see an increase 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 several weeks ago the spread has widened again and is back to trading at an atypically high level of about $22.25/bbl premium to Brent.
With refinery runs expected to increase by about 0.2% 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 0.4 million barrels which would result in the gasoline year over year deficit narrowing to around 9.1 million barrels while the surplus versus the five year average for the same week will widen to about 5.0 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 1.1 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 16.7 million barrels below last year while the overhang versus the five year average will be around 8.1 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 (excluding crude oil) along with an across the board decline in implied demand. Thus based on my projections the comparison to last year will appreciate a tad in that this year's level will gain 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.
The tropical weather is still active with a newly named Tropical Storm...Emily that is currently sitting southeast of Puerto Rico. The latest forecast by the National Hurricane Center shows the severity of Emily not getting much stronger over the next week or so (staying a tropical storm). The projected path is showing that the storm is likely to head up the Florida Coast and then up to the southeastern part of the country. At the moment Emily does seem to be headed for the energy producing region of the US Gulf Coast and thus a storm to watch but not one that will impact oil or Nat Gas prices at the moment. There are no other tropical weather patterns at the moment.
All of the above said for today I am maintaining my oil view at neutral and short term bias at neutral as a relief rally did not last long enough to get too excited about the oil market. I am still seeing uncertainty in the market led by the plethora of macroeconomic data that will hit the media airwaves this week. From a technical perspective the spot WTI contract is hovering near it next support level of around $94/bbl and if breached we could see a retest of the lows of around $90/bbl hit at the end of June. Since early May WTI has been trading in a range of $104 to $90/bbl. All signs currently suggest that a test of the lower end of the range is now more likely.
I am maintaining my Nat Gas view at neutral and keeping my bias at cautiously bearish after last week's disappointing inventory injection report. The market has certainly become more interesting from a short side perspective at the moment as the price has now breached the $4.20/mmbtu support level and seems headed for a test of the psychological $4/mmbtu mark.
Currently most risk asset classes are lower as shown in the following table.
Best regards,
Dominick A. Chirichella
Energy Market Analysis is published daily by the Energy Management Institute 1324 Lexington Avenue, # 322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.
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