Quote of the Day
When words leave off, music begins.
Heinrich Heine
Most risk asset markets gave back a portion of Monday's gains in a relatively volatile trading session on Tuesday. The big events of the day all centered around Europe. First very disappointing GDP data showed Europe's economy is slowing to a snail's pace with the high flying leader Germany almost experiencing no growth in the second quarter. Secondly the much anticipated meeting between Germany's Merkel and France's Sarkozy was mostly a non-event and did little to impact the market in either direction. Each time one of these macro events (like the meeting) occur they impact the markets for a relatively short period of time and then market participants revert back to the normal market drivers like the condition of the economy and unfortunately for the bulls the economic situation is certainly not very supportive at this time. The cloud that has engulfed all risk asset markets, including oil, is still thick and dark and for the moment will serve to limit any surges to the upside. All of the upside moves in oil and equities since the middle of last week must still be categorized as a relief or short covering rally. There is no evidence in the data that suggests the risk asset markets are embarking into a sustained uptrend rally.
On the equity front trading over the last 24 hours has been mixed as shown in the following table of the EMI Global Equity Index. The Index is still in positive territory for the week by about 1.3% after losing 11% of its value over the previous two weeks (lots of recovery room). The Index is down by 14.9% for the year with all ten bourses in the Index still in the negative column and five of the markets showing double digit losses for the year. Brazil continues to be the big loser of the year while the US market has performed the best...or in other words it is the best of the worst as it is only down by 1.5% year to data. Although the macroeconomic data has been a big negative on all economies corporate earnings have been relatively robust (of those reporting already for the second quarter) suggesting that possibly what is going on with the global economy is actually a soft patch that will dissipate and show improvement during the second half of the year. In any case global equities have been a negative driver for oil prices as well as the broader commodity complex.
On the other hand the US dollar has been back under pressure as of late and is providing a modicum of external support for the oil complex. The US Dollar Index has depreciated strongly in value since the middle of July with the Index sitting at the lowest level it has been at since early May...when WTI was trading at its yearly high of about $115/bbl. With WTI now trading around $87.50/bbl you can see why I said the dollar is only acting as a modest support for oil prices.
That all said I still think the US Dollar Index is in a consolidation or bottoming pattern as the fundamentals evolving in Europe suggest that the ECB is now more likely to move back to an accommodative monetary policy which would result in pushing the euro lower and firming the US dollar. If this scenario does in fact occur (I think it has a decent probability of occurring) it would be a bearish outcome for oil prices and would serve to at least cap prices in the short- to medium-term. The Bank of England just announced that they are leaving interest rates unchanged after signaling last month that they were on the cusp of raising rates.
For the moment the strongest support for oil prices over the short term has been the improving fundamental situation. Last week the inventory reports were exceptionally bullish and so far the first part of this week's reports...API data... has been bullish once again. The API reported another surprise draw in inventory except this time it was a 5.4 million barrel draw in gasoline inventories even as refinery utilization rates surged by 0.5% to 87.2% of capacity. They showed a surprise draw in inventory for distillate fuel as well as for gasoline stocks. The market was expecting a modest draw in gasoline stocks and a modest build in distillate fuel inventories this week. On the week gasoline stocks decreased by about 5.4 million barrels while distillate fuel stocks were also lower by about 1.3 million barrels. The only bearish item in the report was the surprise build in crude oil inventories of 1.7 million barrels. However, the API reported a big draw of about 2.0 million barrels of crude oil in PADD 2 with the big build coming in PADD 3 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 very earlier in the year. So far the market has reacted very positively to the API report...especially for gasoline... as the industry awaits the EIA report later this morning. The results of the API report are summarized in the following table. If today’s EIA report is in sync with the API report I would view it as simply bullish.
With the financial and commodity markets still in state of confusion and uncertainty market participants may not put much emphasis on oil fundamentals, especially since there is still no clarity on the financial or external side of the equation. As such we may see the weekly inventory reports not have much of a directional impact unless they come in significantly out of sync with the projections. 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 continue to impact the market.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed and slightly supportive report. I am expecting a modest draw in crude oil stocks as a result of a small increase in refinery utilization rates. I am expecting a modest draw in gasoline inventories and a seasonal build in distillate fuel stocks. I am expecting crude oil stocks to draw by about 1.0 million barrels. If the actual numbers are in sync with my projections the year-over-year deficit of crude oil will widen to about 4.9 million barrels while the overhang versus the five year average for the same week will narrow to 17.1 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 crude oil inventories are in line with the projections I would expect to see an decrease in both PADD 2 and Cushing crude oil stock levels which could potentially impact the Brent/WTI spread.
With refinery runs expected to increase by about 0.2% I am still expecting a modest draw in gasoline stocks as demand likely increased while imports possibly decreased. Gasoline stocks are expected to decline by about 1.0 million barrels which would result in the gasoline year over year deficit widening to around 10.8 million barrels while the surplus versus the five year average for the same week will narrow 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 1.0 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 21.7 million barrels below last year while the overhang versus the five year average will be around 6.9 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.
The tropics have calmed a bit with only one storm evolving in the Atlantic. At the moment there is a tropical wave over the central Caribbean that has a 30% chance of strengthening into a tropical cyclone over the next twenty four hours. At the moment not only is this still a low probability pattern but it does not look like it will be heading toward the US Gulf Cost. It currently looks as if it is heading toward Central America and not toward the energy intensive Gulf Region. So far the tropical season has been a non-event but unfortunately we are just entering the most active part of the tropical weather season and as such we much keep the tropics on our daily radar.
For today I am keeping my oil view and bias at neutral as the markets are still in the midst of mass uncertainty . WTI is marginally higher on the week (so far) after declining on Tuesday. From a technical perspective the spot WTI contract is still above the support level of around $80/bbl and slowly moving toward the $90/bbl resistance level.
I am still expecting WTI to trade in a wide range of $80 to $90/bbl which was the trading range after the US Fed announced QE2 last August but before the geopolitical explosion in MENA. I think the situation in Libya is inching somewhat closer to an end which would then result in more oil coming back into the market. From a trading perspective one has to trade around the aforementioned range until proven otherwise.
I am keeping my Nat Gas view and bias to neutral after last week's positive inventory report but moving my bias back to cautiously bearish as prices are once again trading below the key technical level of $4/mmbtu. With prices now below the $4/mmbtu level the market now seems ready for another attempt of testing the next support level of $3.90/mmbtu.
The main risk to watch at the moment continues to be the fact that most all of the markets remain in an oversold state and short covering is likely to come up again in the short term as volatility will remain at all time high levels.
Currently most markets are higher 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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