Quote of the Day
Fear is pain arising from the anticipation of evil.
Oil continued to recover...basis WTI as unwinding of the Brent/WTI spread accelerated yesterday. So far overnight the spread has recovered by about $0.50/bbl basis the Nov spread which is trading around the $20/bbl mark. The Oct spread goes off the board tomorrow and it is also stronger on the day. The two oil markers continue to be driven by different drivers. WTI is being driven mostly by the ups and downs of the main financial markets...equities and the US dollar while Brent is being driven more by the current fundamentals...Libya, Nigeria and North Sea. With some level of Libyan oil getting closer to flowing along with the North Sea nearing the end of its maintenance season the supply loss premium that has been built into the price of Brent has begun to unwind and is likely to continue to unwind over the next month or so. The spread is now trading over $5/bbl below the all time record peak level it hit about a week ago. As I warned yesterday it is a resilient spread and the downside correction that seems to be underway can change on a dime at any time. Right now if the correction continues the next support level of the Nov spread is around the $18/bbl level.
Although the massive selling has subsided in Europe for the moment the same risks that existed to start the week remain. European leaders are still scrambling to come up with a lasting solution to the sovereign debt issues in Greece and the rest of the southern EU member countries. China and the rest of the BRIC nations have thrown their hats into the ring and said that they would discuss ways to help Europe at their upcoming meeting next week. China went on to signal that they would potentially invest in Europe if those countries needing the investment would take all of the necessary measures to control the debt problems...not unlike comments we have heard over the months from the IMF and other EU member countries.
Austerity measure continue to be in the forefront of the EU countries with the debt problems with another debt restructuring likely for Greece along with the ECB also likely to change its monetary policy and quickly begin to lower interest rates (after starting to increase them just months ago). Europe continues to be the main price driver for all global risk asset markets and will likely continue to impact all values for the near term. The market is looking for a sign that a lasting solution is at hand. Until a solution emerges the market will continue to remain engulfed in a cloud of uncertainty and any rallies will likely only be short covering rallies and not the beginning of a new up leg.
The markets have experienced a modest level of short covering over the last few days especially for WTI. Some of the global equity markets have recovered a bit from the lows experienced on Monday as shown in the EMI Global Equity Index table below. That said the Index is about unchanged over the last twenty four hours with most bourses in the developed world adding value while several markets in Asia and Brazil continued to slide. The Index is still down by 16.7% for the year with eight of the ten bourses in the Index still showing double digit losses for 2011. Paris and Germany remain in bear market territory with Brazil very near moving back above the 20% loss threshold. Equities continue to suggest a bearish outlook for the global economy and thus a bearish outlook for oil demand growth and oil prices going forward.
Following the above comment the IEA released their latest monthly oil market report yesterday and as expected they lowered their oil demand growth forecast for both 2011 and 2012 on the basis of a slowing global economy. The highlights of their report follow:
Uncertain global economic and financial prospects underpinned volatile oil futures prices in August and early September. WTI and Brent followed divergent paths last month, with the price spread hitting record levels of over $27/bbl in early September. Prices at writing were $111/bbl for Brent and $86/bbl for WTI.
Global oil demand is revised down by 0.2 mb/d for 2011 and by 0.4 mb/d for 2012 on lower non-OECD readings and reduced economic growth expectations. Global GDP growth is now seen at 3.9% in 2011 and at 4.2% in 2012 with significant downside risks. Demand estimates now stand at 89.3 mb/d in 2011 (+1.0 mb/d y-o-y) and 90.7 mb/d in 2012 (+1.4 mb/d y‑o‑y).
World oil supply rose by 1.0 mb/d in August, to 89.1 mb/d, with non-OPEC production up by 0.8 mb/d. Rising US and Latin American production offset heavy maintenance and field outages in the North Sea. Non-OPEC supply has been revised lower to 52.8 mb/d in 2011 on outages in the Middle East and China, rising to 53.8 mb/d in 2012.
August OPEC crude oil output was up by 165 kb/d, to 30.26 mb/d with production still 1.04 mb/d below the 31.3 mb/d 3Q11 ‘call on OPEC crude and stock change’. However, the ‘call’ for 4Q11 has been lowered by 0.2 mb/d to 30.5 mb/d, due to weaker demand. With the end of Libya’s civil conflict on the horizon, we have revised up our Libyan capacity outlook for 4Q11 by 0.1 mb/d, to 0.3 mb/d.
Global refinery crude runs have been revised down by close to 0.3 mb/d for both 3Q11 and 4Q11 in light of the weaker demand outlook and higher outages scheduled for a number of countries. Global throughputs are now seen rising 1.7 mb/d in 3Q11 versus 2Q11, to 75.6 mb/d and averaging 75.4 mb/d in 4Q11.
OECD industry oil inventories rose by 10.8 mb to 2 687 mb, or to 58.4 days of forward demand, in July. Stocks fell below the five-year average for the first time since the economic recession of 2008. Preliminary data indicate OECD stocks remained tight in August, rising by a modest 0.6 mb.
The API data came in with a few surprises once again this week. The API reported another large surprise in inventory except this time it was a 5.1 million barrel draw in crude oil stocks... mostly all a result of the preemptive production shut-in and halting of imports ahead of TS Lee. The API reported a surprise build in gasoline inventories versus a projected draw and a small build in distillate fuel that was close to the expectations.
The market was expecting a more modest draw in crude oil stocks and a small decline in gasoline inventories this week. The main bullish item in the report was the larger than expected draw in crude oil inventories. The API reported a large draw of about 5.1 million barrels of crude oil with a 400,000 barrels decline in Cushing and no change in PADD 2. The bulk of the draw was in PADD 3 or the Gulf region as related to TS Lee. So on the surface it looks bullish but in reality it is not overly bullish as the loss of imports and production were just temporary and are all back to normal already. On the week gasoline stocks increased by about 2.8 million barrels while distillate fuel stocks were built by about 0.1 million barrels. The refined products part of the report was bearish.
With the financial and commodity markets still in state of turmoil and uncertainty it is not clear if today's EIA oil inventory reports will have a major impact on price direction. The more widely watched EIA data will be released at 10:30 am today. My projections for the EIA 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 build in distillate fuel stocks. I am expecting crude oil stocks to decline by about 3.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 7.3 million barrels while the overhang versus the five year average for the same week will come in around 24.4 million barrels. My projection risk for crude oil is to the upside as stocks could have actually declined a lot less than expected as the storm did not cause any infrastructure damage.
With refinery runs expected to decrease by about 0.4% I am expecting a modest draw in gasoline stocks as demand likely decreased but imports possibly increased. Gasoline stocks are expected to decline by about 1.0 million barrels which would result in the gasoline year over year deficit narrowing to around 16.6 million barrels while the deficit versus the five year average for the same week will come in at about 1.1 million barrels.
Distillate fuel is projected to increase modestly by 0.4 million barrels on a combination an increase in production but a possible decline in imports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 17.3 million barrels below last year while the overhang versus the five year average will be around 6.8 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 and with a modest decrease 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.
For today I am keeping my view at neutral as all of the external market drivers that impact oil prices are somewhat on hold to start the day. However, yesterday a modest short covering rally occurred in WTI (as discussed in the beginning of the newsletter) and as such it is best to stand aside.
I am keeping my Nat Gas view and bias at neutral even as prices are hovering around the next the $4.00/mmbtu. The market has been tropics driven but I expect the tropics will play a lesser role this week.
Currently the markets are mixed 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.
EMA has authorized Futures to publish its report once a week on Wednesday prior to the EIA release. For information on how to receive the report everyday look below.
PH: (888) 871-1207
Information and opinions expressed in this publication are intended to provide general market awareness. The Energy Management Institute and the Energy Market Analysis are not responsible for any business actions, market transactions, or decisions made by its readers based on information published in this report. Readers of the Energy Market Analysis use this market information at their own risk.
This message and any attachments relate to the official business of the Energy Management Institute ("EMI") and are proprietary to EMI. This e-mail transmission may contain information that is proprietary, privileged and/or confidential and is intended exclusively for the person(s) to whom it is addressed. Any use, copying, retention or disclosure by any person other than the intended recipient or the intended recipient's designees is strictly prohibited.