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Ashley Young
Yesterday was not much different than the last month or so... another trading session dominated by a high level of volatility caused by a growing uncertainty over the economic recovery in both the US and Europe coupled with mounting exposure to the sovereign debt issues in the EU and the deficit in the US. The week started all about Europe as the sovereign debt issues drew the attention of all of those in the market on a day when liquidity was limited by the US holiday. Concerns over the potential for default in both Greece and Italy once again stole the headlines and became the main price driver for all risk assets... at least for a day.
However, as the full complement of market participants hit the scene on Tuesday the downdraft that began on Monday started to subside. In fact after the initial sell-off, US equities gradually moved into an intraday recovery rally re-taking about two thirds of its earlier loss in equities by the closing bell. Oil and most other commodity markets followed suit as the US dollar (and gold) also began to lose its safe haven status and moved into negative territory. The short covering rally has continued overnight as Japan reported that their recovery from the earthquake and tsunami was on track and as such have left interest rates unchanged while Australia reported a better than expected GPD for the second quarter of 1.4%. In addition there was talk overnight that China may be on the cusp of moving to a less restrictive monetary policy in the near future.
In fact as of this writing most equity markets and oil prices are now fully recovered (and then some) from Monday's sell-off but still are below the level they were trading at prior to the bearish jobs number released in the US last Friday. The spot Nymex WTI contract is currently higher by about $0.30/bbl versus Friday's closes (discounting all of the EU sell-off from Monday) but still about a $1/bbl or so below where it was trading prior to the jobs data. The good news is the markets have now pretty much discounted the EU issues (for the moment) and yes some of the latest macroeconomic data is better than expected (Australia). However, the bad news that continues to impact the markets is simply the fact that the global economy is slowing and how quickly and how deeply it contracts will dictate the ultimate direction of all risk asset markets. I view the gains in oil and equities which began mid-day yesterday US time to be nothing deeper than a short covering rally at this point in time.
As mentioned before, the last 24 hours have been tumultuous for the global equity markets (and all risk asset market for that matter) have started out with across the board selling only to make an abrupt halt and reverse back to the upside. In fact only two of the ten bourses in the Index are in negative territory as shown in the following table of the EMI Global Equity Index. That said US equity futures are pointing to a higher opening on Wall Street today which would erase all of the losses in both the US and Canada (if it holds). The Index is now down just 0.7% on the week but as mentioned above it is likely to be erased if the direction of the markets in the west hold up throughout the upcoming session in the US. Equities have been negative for oil prices as well as the broader commodity complex to start the week but have now moved to being a positive short term price driver for oil as well as other commodity markets.
With the financial and commodity markets still in state of turmoil and uncertainty it is not clear if this week's oil inventory reports will have a major impact on price direction. At the moment with all of the financial uncertainty permeating around the global markets it is difficult to say if and when this week's report will impact the market. The normal weekly reports get underway late this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Thursday morning. I also want to caution that this week's data is going to be 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 as well as the preemptive shut-downs in the oil producing region of the Gulf of Mexico ahead of TS Lee last week. The data is likely to show some surprises but be careful before jumping in based on this week's data until the market digests the information. I have based my projections on the impact from TS Lee as well as the left over impact from Irene the week before.
My projections for this week’s inventory reports are summarized in the following table. I am expecting an across the board draw in inventories and a decline in refinery utilization rates which should result in a supportive or bullish weekly fundamental snapshot. I am expecting a modest draw in crude oil stocks with a decrease in refinery utilization rates. I am expecting a modest draw in gasoline inventories and a smaller decline in distillate fuel stocks. I am expecting crude oil stocks to decline by about 2.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 4.8 million barrels while the overhang versus the five year average for the same week will come in around 25.3 million barrels. My projection risk for crude oil is to the downside as stocks could have actually declined more strongly depending on the combination of how much additional oil was held offshore 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 0.9% and with consumer buying of gasoline ahead of Irene (still impacting this week's data) and TS Lee 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 1.8 million barrels which would result in the gasoline year over year deficit widening to around 18.3 million barrels while the surplus versus the five year average for the same week will come in at about 2.1 million barrels.
Distillate fuel is projected to decrease modestly by 0.8 million barrels on a combination a decrease in production and a possible decline in 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 19.6 million barrels below last year while the overhang versus the five year average will be around 6.3 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 a similar situation with an across the board decline in inventories but with a modest increase in refinery run rates. 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.
This afternoon the EIA will release their latest Short Term Energy Outlook (STEO) report (around mid-session). As has been the case of the last several months the most important part of the report (in my view) will be the EIA's projection for global oil demand growth for this year as well as for 2012. Last month's report was the first time the EIA stated to downwardly adjust their projections as a result of the faltering global economic recovery. Since last month the macroeconomic data has been more bearish and more and more analysts have downgraded their expectations for economic growth in both the developed and developing world. As such I would expect the EIA report to show another downgrading of their oil demand growth projections. The IEA will release their report next Tuesday morning, September 13.
One of the big features in the energy markets is the tropics. With TS Lee now in the history books the NHC is now projecting three new potential storms and one that remains potent but out of harm's way for people as well as the energy sensitive Gulf of Mexico (Katia). Following is the latest chart of the Atlantic tropics showing several storms... any of which could potentially impact oil and Nat Gas production with the exception of Hurricane Katia. The new disturbance in the southern Gulf has a 40% chance of strengthening over the next forty eight hours. In addition there are two other storms in the Atlantic the closer in one has a 10% chance of strengthening while the one further out in the Atlantic is now Tropical Depression 14. TD 14 is projected to take more of a southwestern route than did Irene or Katia and as such could be one of those storms that does impact the US in about a week to ten days including the US Gulf of Mexico. In addition the tropical disturbance that is already in the Gulf could potentially find its way into the energy sensitive portion of the Gulf. We remain in the peak of the season and as such it is serving as a reminder to the energy sector bears that anything can happen with the risk being a loss of production as we already saw from TS Lee. Fortunately Lee moved away without any major infrastructure damage.
For today I am moving my oil view and bias back to neutral as we are now clearly back in a short covering rally mode. This week is going to be all about stimulus talk for the US and sovereign debt issues for Europe with a sprinkling of the fundamentals and tropics. As I mentioned in yesterday's report after the collapse in prices on Monday I expected to see a bit of short covering emerge and it did as equities rebounded and oil players turned some of their attention to the delayed inventory report (delayed until Thursday) which should be somewhat bullish based on the preemptive shut-ins in the Gulf ahead of TS Lee.
I am keeping my Nat Gas view and bias at neutral even as prices have now breached the key resistance level of $3.90/mmbtu. What is seemingly offsetting any bearish sentiment at the moment is the plethora of tropical weather patterns that have been identified by the NHC (see above).
Currently the markets are mostly higher as shown in the following table.
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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