Quote of the Day
Every renaissance comes to the world with a cry, the cry of the human spirit to be free.
Anne Sullivan
A very strong short covering rally engulfed most all risk asset markets on Tuesday as more and more participants seem to be expecting some sort of positive outcome from US Fed Chairman Bernanke's Friday morning Jackson Hole speech. The expectations are building but the market could be in for a disappointment. The other side of the view that the Fed Chairman will not announce anything significant on Friday has crept back into the markets in overnight trading as most all of the Asian equity markets traded lower with US equity futures currently pointing to a lower opening on Wall Street this morning. Over the last month or so all risk asset markets have experienced an above normal level of volatility with many intraday and day to day price reversals. At the moment the equity markets are in the midst of yet another one of those reversals while oil prices hover around the unchanged level (except for RBOB gasoline which is solidly lower on a bearish API number).
Bottom line is market participants at every level of the trading/investing infrastructure are uncertain and unclear as to where the global economy goes from here....does it continue to weaken or is this still just a soft patch that will turn around sooner than later? More than anything else the various views around the previous question is the main value driver for all risk asset markets around the world. The trading/investing world is still clearly in a macro or systemic trading pattern....everything goes up or everything goes down. Individual fundamentals for individual risk asset markets are still only playing a minor role in price setting. I expect this pattern to continue until there is more clarity as to the future state of the global economy.
The global equity markets did get a boost with yesterday's short covering rally in the west as shown in the EMI Global Equity Index table below. Although the rally did not carry over into the Asian markets (where the skepticism is emerging over what Bernanke will say) the Index is still higher by 1.5% on the week narrowing the year to date loss to 17%. The overall Index is still on the cusp of meeting the criteria for a bear market...a decline of 20% or more with Brazil remaining over the bear market threshold. The global equity markets were a modest support for oil prices as well as the broader commodity complex on Tuesday but overall equities have been a negative price driver for oil. In spite of the occasional short covering rally like we experienced yesterday global equities have been trading and seemingly already pricing in a return to a double dip recession in the developed world and an ongoing slowing of the economies of the developing world as a result of monetary tightening in that region of the world. Equities tend to be a decent leading indicator of the forward economy and based on the equity market trading pattern the global economy is likely to continue to languish.
As is usually the case (especially with the API data) the market was surprised by the numbers in the latest API reported released late yesterday afternoon. The API reported another large surprise in inventory except this time it was a 6.4 million barrel build in gasoline inventories as refinery utilization rates surged by 1.8% to 89% of capacity. Last week the API reported a large surprise draw in gasoline inventories of 5.4 million barrels thus completely offsetting last week's gasoline snapshot and then some. They showed a larger than expected build in inventory of distillate fuel and a larger than expected draw in crude oil stocks.
The market was expecting a small draw in gasoline stocks and a modest build in distillate fuel inventories this week. On the week gasoline stocks increased by about 6.4 million barrels while distillate fuel stocks were also higher by about 2.0 million barrels. The only bullish item in the report was the larger than expected draw in crude oil inventories of 3.3 million barrels. They also reported a big draw of about 1.5 million barrels of crude oil in PADD 2 with modest build of about 0.5 million barrels in Cushing, Ok. 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 late last year. So far the market has reacted slightly negative to the API report...mostly 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 biased to the bearish side.
With the financial and commodity markets still in state of confusion and uncertainty I would expect the externals will lead the short term direction for oil prices (and most risk asset markets) with only a secondary impact from the inventory data. My projections for this week’s EIA inventory reports are summarized in the following table. I am expecting a mixed and slightly bearish report. I am expecting a modest build in crude oil stocks even with 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 build 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 narrow to about 3.4 million barrels while the overhang versus the five year average for the same week will widen to 19.9 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. I am also expecting to see a modest 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 0.7 million barrels which would result in the gasoline year over year deficit widening to around 16.2 million barrels while the surplus versus the five year average for the same week will narrow to about 0.5 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 20.7 million barrels below last year while the overhang versus the five year average will be around 8.3 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 along with a corresponding decline in implied product 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 modest change in the year over year status if the actual numbers are in line with my projections.
The main event in the tropics continues to be Hurricane Irene as it slowly moves up toward the eastern Atlantic coast. The latest analysis from the National Hurricane Center suggests that Irene will maintain its hurricane status throughout the upcoming week and actually strengthen into a major category three storm as it moves north eastward. At the moment the projected path shows Irene working its way up the eastern coast away from Florida with landfall someplace around southeastern North Carolina and possibly again in New England. It is early and many things can happen to change the exact path and landfall location. However, Irene will not impact the oil and Nat Gas producing operations in the Gulf of Mexico rather this is turning out to be an east coast storm.
In addition there are now two waves out in the eastern Atlantic with one wave currently having a 0% chance of strengthening and possibly dissipating over the next few days. It is also a wave that looks like if it does not strengthen it will wind up in the northern Atlantic. The other wave which is about 125 miles west of the Cape Verde Islands now has a 40% chance of forming into a tropical cyclone over the next forty eight hours. This waves currently does not look like it will dissipate anytime soon and could be next week's tropical weather story.
The tropics do not require any action in the energy markets at this time. So far the tropical season has been a non-event for oil and Nat Gas production 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 to neutral even though not much has changed from last week (economy) except for the likely ending of the Libyan civil war. As the dust settles we will get a better feel as what impact Libya will have on oil prices going forward. On the surface it should be a bearish impact. In addition I would say that the Brent/WTI spread has peaked with further depreciation in value likely over the coming weeks.
Although I am moving my overall oil view to neutral I will warn all that any strong rally in global equities and/or a strong decline in the US dollar are likely to trump the additional oil coming from Libya and result in oil prices also moving into a short covering rally (which we have seen in WTI & Brent yesterday). The oil complex is very oversold just like the rest of the risk asset markets. Also expect another week of above normal levels of volatility and very choppy trading.
I am moving my Nat Gas view and bias to neutral as weather conditions and nuclear capacity shut-ins are changing. With prices now hovering around the $4/mmbtu level the market now be looking to move higher. Until the dust settles I am moving to the sidelines.
Currently the markets are mostly lower as shown in the following table.
Best regards,
Dominick A. Chirichella
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