Quote of the Day
The art of being wise is the art of knowing what to overlook.
William James
After a strong move to the upside on Tuesday oil prices hit a wall after the API data showed a much larger than expected build in crude oil stocks (see below for a more detailed discussion of the report). Crude oil futures are in negative territory with WTI leading the way lower and losing further ground on Brent after a surprisingly large build in PADD 2 crude oil stocks in last night's API report. RBOB gasoline is the only commodity in the oil complex holding onto minor gains after a much larger than expected decline. For the moment the oil complex is trading mostly around the oil inventories and paying little attention to the modest rally underway in equities.
The sentiment is building that the US Fed will initiate some form of quantitative easing based on some speeches from Fed members as well as the details of the FOMC meeting minutes which were released yesterday afternoon. The minutes showed that some members wanted more substantial action at the August meeting but accepted a stronger forward guidance statement regarding short term interest rates. Whether or not a new round of qualitative easing emerges it will be at least until the end of September at the next FOMC before that is know. For now the markets will move based on perception as well as what the plethora of macroeconomic data suggest between now and then.
Today the first shot over the bow of employment data hits the media airwaves with the release of the ADP private sector jobs report. This is an early market mover ahead the more important US Labor Department nonfarm payroll data to be released on Friday morning. The next several days will be impacted by the macroeconomic data and can easily result in large swings in either direction for most risk asset markets including oil.
Over the last 24 hours all bourses in the EMI Global Equity Index table gained ground as shown in the following table. The Index gained almost 1% over the last 24 hours with the developed world markets leading the Index higher. The Index is now higher by 2.8% so far this week resulting in the year to date loss narrowing to 14.2%. The US Dow has been the best performing bourse in the Index for most of the year and is currently showing the smallest loss while being on the cusp of moving back into positive territory for the year. With US equity futures projecting a higher opening on Wall Street this morning the US market could wind up in the winners column by the end of the day if today's macroeconomic data is friendly. Equities have been a positive for oil price (except for this morning) as well as the broader commodity complex over the last few days.
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 for the second week in a row. The API reported another large surprise in inventory except this time it was a 5.1 million barrel build in crude oil stocks as refinery utilization rates plunged by 2.1% to 86.9% of capacity. The API reported a large surprise draw in gasoline inventories of 3.1 million barrels a build in inventory of distillate fuel that was within the expectations.
The market was expecting a smaller draw in gasoline stocks and a small build in distillate fuel inventories this week as the impact of the logistics shut-ins associated with Hurricane Irene work their way through the oil infrastructure. On the week gasoline stocks decreased by about 3.1 million barrels while distillate fuel stocks were built by about 0.3 million barrels. The main bearish item in the report was the larger than expected build in crude oil inventories of 5.1 million barrels. They also reported a big build of about 2.8 million barrels of crude oil in PADD 2. Crude oil stocks in the mid-west are not as high as they once were and even with this week's increase they are around the level they were at back late last year. However, the API build was a set-back to those expecting a correction in the Brent/WTI spread in the very short term...especially if the EIA report shows the same level of builds in PADD 2. So far the market has reacted slightly negative to the API report...mostly for WTI... 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 it is not clear if this week's oil inventory reports will continue to have an impact on price direction. The more widely watched EIA data will be released today at 10:30 AM. I also want to caution that this week's data (as well as next week's reports) are going to be somewhat impacted by the combination of some logistical shut downs of oil operations along the US East coast ahead of Irene along with a large amount of consumers topping off of their gasoline tanks ahead of the storm.
The inventory data for refined products is at the wholesale level and all of the pre-buying by consumers of gasoline will not completely show up in this week's data since the data is as of last Friday and retail sales likely did not fully permeate back to the wholesale level. The data is likely to show some surprises but be careful before jumping in based on the data until the market digests the information. I have made some adjustments to my projections based on the storm.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed and somewhat neutral report. I am expecting a modest build in crude oil stocks with a small decrease in refinery utilization rates. I am expecting a modest draw in gasoline inventories and a smaller than normal build in distillate fuel stocks. I am expecting crude oil stocks to build by about 0.9 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 9 million barrels while the overhang versus the five year average for the same week will narrow to 17.2 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 how much crude oil was held away from the east coast ahead of the storm. I am 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 decrease by about 0.2%and with consumer buying of gasoline ahead of Irene I am 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 15 million barrels while the surplus versus the five year average for the same week will come in at about 1.5 million barrels.
Distillate fuel is projected to increase marginally by 0.2 million barrels on a combination a decrease in production and a possible decline i imports from the storm. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.3 million barrels below last year while the overhang versus the five year average will be around 8.4 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 a mixed picture with builds in total stock led by a large build in crude oil and modest declines in refined products. Thus based on my projections the comparison to last year will not change too much compared to last year's level. As such I do expect only minor changes in the year over year status if the actual numbers are in line with my projections.
On the tropical front Irene is now in the history books but the National Hurricane Center has upgraded a relatively large eastern Atlantic wave to Tropical Storm Katia. The current path of this storm is possibly heading toward the US following a similar path that Irene took. Katia is already projected to strengthen further (projected to be major hurricane or a Cat 3 storm by early Sunday morning) and possibly wind up some place in the US...including the US Gulf of Mexico. Right now Katia is moving on a west-northwest track and Accuweather is indicating that the long range computer models suggest Katia may cut up across the central Atlantic towards Bermuda by the middle of next week. But keep in mind it is very early to lock into a projected path with a high degree of confidence. We are in the peak of the tropical weather season so expect more frequent storms to evolve increasing the exposure to the energy intensive US Gulf Coast area. So far the season has not impacted Nat Gas or oil production in the Gulf. That said the tropics remain an area of interest for all those in the energy sector.
For today I am keeping my oil view and bias at 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 this week's price activity will continue to be mostly driven by the daily release of various macroeconomic indicators as the market continues to try to assess whether or not economic growth will stabilize and begin to pick up and/or if the Fed will crank up the printing presses yet again with another round of QE.
I am keeping my Nat Gas view at neutral and moving my bias back to neutral as prices have now breached the intermediate resistance level after coming within $0.03/mmbtu of hitting the lower support level of $3.75/mmbtu. For now the market is likely heading for a test of the $4/mmbtu support level. Unfortunately the trend for Nat Gas is still range bound with little conviction in either direction at the moment.
Currently the markets are mixed as shown in the following table.
Best regards,
Dominick A. Chirichella
