Quote of the Day
There is a wisdom of the head, and a wisdom of the heart.
Charles Dickens
Volatile was the single best way to describe the activity on Tuesday and pretty much this entire week so far. On top of the massive relief rally that got underway after the US Fed announced that they were going to leave short term interest rates near zero for the next two years, the API released their weekly inventory report (see below for more details) that showed an extremely large decline in crude oil stocks as well as modest declines in refined product inventories. Simply a bullish fundamental snapshot. That sent oil prices off to the races because oil was unable to get into the positive territory during the Bernanke relief rally. Oil traded in over a $7/bbl trading range on Tuesday with prices up well over 3.5% so far today. As of the moment I would categorize the rally in oil (and the gains in just about everything since yesterday afternoon) as still a short covering rally as the concerns over the slowing global economy has not changed all that much over the last 24 hours.
What has changed is that the Europeans continue to buy the debt of the weak EU member countries like Italy and Spain and the US Federal reserve assured the market that it will keep interest rates low for years not month. The Fed pledge is viewed as another way of driving cash into the risk asset markets as participants look for yields. At least since yesterday afternoon that logic has worked as money seemed to move into the equity and commodity market in conjunction with the shorts heading to the sidelines. The bad news out of the FOMC meeting is the fact that the Fed said the US economy is growing considerably slower than expected. So yes money may likely continue to flow into equities which should be supportive for oil prices but the underlying fact that the US economy, as well as most other economies around the world, is growing at a snail's pace and is still troubling and clouding a sustained rally at the moment.
As shown in the following table of the EMI Global Equity Index all ten bourses in the Index have participated in the relief or short covering rally since yesterday afternoon. However, the Index is still showing a loss of 2.5% for the week while the year to date loss for the Index is close to 18%. All ten bourses are still in negative territory with the US still the leader of the pack with the smallest year to date loss. Even with all of the negativity surrounding the US economy of late from an equity investment point of view it is still the optimum place to invest compared to any other market shown in the Index. Seven of the ten bourses in the Index are still showing double digit losses with both China and Canada on the cusp of going into double digit territory also. Right now I would categorize the markets as being driven by those looking for yields with lots of eyes focused on the equity markets. Whether or not the market rout has ended is still a bit unclear as the markets will quickly be turning away from the actions of the ECB and the US Fed and once again starting to focus on the next round of macroeconomic data. A bumpy ride is still expected in equities and thus also in the oil and broader commodity complex.
Yesterday afternoon the EIA released their monthly STEO report while the IEA just released their report. Neither agency made any strong downward adjustment to oil demand growth but at least the IEA said that the way the global economy is going, it could cut oil demand growth next year by more than 60%. At least they are acknowledging that oil demand growth is likely to underperform the forecasts they just have not made those adjustments to their forecasts. Following are the main highlights of both the IEA and EIA reports.
Highlights from the IEA report.
Market crude prices have lost $12-$15/bbl since early-August amid growing concerns over government debt and the likely impact on the global economy. At writing, Brent and WTI futures stood at $103/bbl and $80/bbl respectively. This follows July’s relative calm, when crude rose by $1-$3/bbl, accompanied by modest gains in refining margins.
Global 2011 oil demand is trimmed by 0.1 mb/d on weaker baseline and 2Q11 data, high prices and slowing economic growth. The 2012 outlook is raised by 0.1 mb/d due to oil-fired power needs in Japan. Demand averages 89.5 mb/d in 2011 (+1.4% or 1.2 mb/d y-o-y) and 91.1 mb/d in 2012 (+1.8% or 1.6 mb/d). A lower GDP case would cut 0.3 mb/d and 1.3 mb/d respectively from 2011 and 2012 demand.
World oil supply in July rose by 0.6 mb/d from June, to 88.7 mb/d, with non-OPEC production up by 0.4 mb/d. Rising Canadian production offset lower UK production. Non-OPEC supply is now seen averaging a lower 53 mb/d in 2011 on prolonged production outages, rising to 54 mb/d in 2012.
OPEC crude supply in July averaged 30.05 mb/d, up by 0.1 mb/d from June. Output has regained levels close to those seen before the Libyan crisis, although OPEC spare capacity now stands at only 3.3 mb/d. Output still lags a ‘call on OPEC crude and stock change’ that averages 31 mb/d in 2H11 and 30.8 mb/d for 2012.
June OECD industry oil inventories fell counter-seasonally by 11.8 mb to 2 678 mb, or 58.4 days of forward demand. The surplus to the five-year average narrowed significantly, from 18.2 mb in May to 4.7 mb in June. Preliminary July data suggest an 18.5 mb gain in onshore OECD inventories, but floating storage fell.
Global refinery crude runs for 2Q2011 have been raised by 0.1 mb/d since last month, as surging Russian June throughputs offset weaker-than-expected Chinese runs. 3Q11 estimates are unchanged, up 2.2 mb/d from 2Q11, at 75.9 mb/d, as stronger expected OECD runs counteract a weaker picture for non-OECD Asia.
Highlights from the EIA report.
Crude Oil and Liquid Fuels Overview. Global oil demand growth, led by China, is expected to outpace the growth in supplies from countries outside of the Organization of the Petroleum Exporting Countries (OPEC), leading markets to rely on both a drawdown of inventories and production increases in OPEC countries to close the gap. However, OPEC countries are not expected to markedly increase production over the next few months.
Among the major upside risks in the crude oil price outlook are additional supply disruptions in producing regions and higher-than-expected demand growth, particularly in the countries that are not members of the Organization for Economic Co-operation and development (OECD). Downside risks for oil prices include the rate of global economic recovery and fiscal issues facing national and sub-national governments.
Global Crude Oil and Liquid Fuels Consumption. World crude oil and liquid fuels consumption grew to a record high 86.8 million barrels per day (bbl/d) in 2010. Despite continued concerns over the pace of the global economic recovery, particularly in OECD countries, EIA expects that world consumption to grow by 1.4 million bbl/d in 2011 and by 1.6 million bbl/d in 2012, outpacing average global demand growth of 1.3 million bbl/d from 1998-2007, prior to the onset of the global economic downturn. Countries outside the OECD make up almost all of the projected growth in consumption over the next two years, with China accounting for almost half of this growth. Chinese oil demand continues to show strong growth despite Chinese measures to cool its economy down, and EIA's projections for Chinese oil demand growth have again been revised upwards.
Non-OPEC Supply. EIA projects that non-OPEC crude oil and liquid fuels production will increase by an average 650 thousand bbl/d in 2011 and 2012. The greatest increases in non-OPEC oil production during 2011 and 2012 occur in Brazil, Canada, China, Columbia, Kazakhstan, and the United States, with annual average growth in each country of over 100 thousand bbl/d. At the same time, EIA expects production declines this year in the North Sea region of 140 thousand bbl/d, particularly in the United Kingdom, as well as declines in Yemen of 140 thousand bbl/d stemming from ongoing strife.
OPEC Supply. Forecast OPEC crude oil production is unchanged from last month's Outlook. EIA expects OPEC crude oil production will decline by about 250 thousand bbl/d in 2011, in large part due to the supply disruption in Libya. EIA assumes that about one-half of Libya's pre-disruption production will resume by the end of 2012, contributing to an overall increase in OPEC production of 500 thousand bbl/d in 2012. EIA projects that OPEC surplus crude oil production capacity will fall from 4.0 million bbl/d at the end of 2010 to 3.5 million bbl/d at the end of 2011, followed by a further decline to 3.3 million bbl/d by the end of 2012. Forecast OPEC non-crude liquids production, which is not subject to production targets, is expected to increase by 520 thousand bbl/d in 2011 and by 410 thousand bbl/d in 2012.
OECD Petroleum Inventories. EIA expects that OECD commercial inventories will decline in both 2011 and 2012. Days of supply (total inventories divided by average daily consumption) drop from a relatively high 58 days during the fourth quarter of 2010 to 56 days and 55 days in the fourth quarters of 2011 and 2012, respectively.
Crude Oil Prices. West Texas Intermediate (WTI) crude oil spot prices fell from an average of $110 per barrel in April to $97 per barrel in July. During the first week of August, world crude oil prices fell by about $10 per barrel reflecting market concerns about world economic and oil demand growth.
However, EIA still expects oil markets to tighten as growing liquid fuels demand in emerging economies continues to outpace supply growth with continuing upward pressure on oil prices. EIA expects that WTI spot prices, which averaged $79 per barrel in 2010, will average $96 per barrel in 2011 and $101 per barrel in 2012, while the U.S. refiner average crude oil acquisition cost is projected to average $100 and $107 per barrel in 2011 and 2012, respectively.
U.S. Liquid Fuels Consumption. Total consumption of liquid fuels in 2010 grew by 410 thousand bbl/d, or 2.2 percent, the highest rate of growth since 2004. In contrast, projected total U.S. liquid fuels consumption in 2011 falls by 150 thousand bbl/d (0.8 percent), a reversal of the small 30 thousand bbl/d increase projected in last month's Outlook. Motor gasoline and distillate fuel each account for about one-fourth of the change.
EIA expects total liquid fuels consumption to increase by 170 thousand bbl/d (0.9 percent) to 19.2 million bbl/d in 2012, with motor gasoline consumption rising by 50 thousand bbl/d (0.6 percent) and distillate fuel consumption increasing by 70 thousand bbl/d (1.8 percent) as economic growth improves and retail liquid fuels prices show only small increases from this year.
The API reported another surprise crude oil inventory draw of about 5.2 million barrels as refinery utilization rates surged by 0.5% to 87.6% of capacity. The API reported a draw of about 1.1 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 surprise draw in inventory for distillate fuel as well as for gasoline stocks. The market was expecting a small build in gasoline stocks and a modest build in distillate fuel inventories this week. On the week gasoline stocks decreased by about 1.0 million barrels while distillate fuel stocks were lower by about 0.6 million barrels. The results of the API report are summarized in the following table. So far the market has reacted very positively 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 simply bullish.
My projections for this week’s EIA inventory reports are summarized in the following table. I am expecting a modestly bearish report (for the third week in a row) with an across the board build in oil stocks. I am expecting a modest build in crude oil stocks as a result of 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 flip to a small surplus of about 1.0 million barrels while the overhang versus the five year average for the same week will widen to 20.7 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 $22.90/bbl premium to Brent.
With refinery runs expected to increase 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 0.5 million barrels which would result in the gasoline year over year deficit narrowing to around 7.7 million barrels while the surplus versus the five year average for the same week will widen to about 6.8 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 1.3 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 19.6 million barrels below last year while the overhang versus the five year average will be around 8.0 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 (excluding crude oil) along with mixed picture for 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.
All of the above said for today I am moving my oil view and bias to neutral as the markets are now in the midst of a relief or short covering rally. However, it is unclear as to how deep the current moves will be and if this is the beginning of a new upward trend or simply a short lived relief rally. From a technical perspective the spot WTI contract is now above the support level of around $80/bbl after falling well below that level on an intraday basis yesterday. From a trading perspective one now has a reference point for trading WTI the...$80/bbl support is now the stop for those playing the relief rally.
I am keeping my Nat Gas view at cautiously bearish 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 is now back to trading around the $4.00/mmbtu support level.
The main risk to watch at the moment is the fact that most all of the markets are still in an oversold state and short covering is likely to continue in the short term but volatility will remain at all time high levels.
Currently oil prices are surging while equities are steady as shown in the following table.
Best regards,
Dominick A. Chirichella
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