Quote of the Day
Money is hard to earn and easy to lose. Guard yours with care.
Brian Tracy
A choppy trading market as all of this week's events slowly begin to surface. That said Greece is by far still the number one market price catalyst and will remain the main issue for the foreseeable future. Talks between Greece and its main lenders are making progress with the next round of meetings scheduled for early next week. The EU/IMF missions are the ones that will recommend whether or not Greece receives its next or sixth round of bailout funds. As much as many in the market believe that a Greek default may be the best long term course of action I do not think the Europeans are ready for the contagion exposure if Greece does in fact default. Thus I believe Greece will get its next round of financing and all will be well in euro land for a few weeks or maybe even a month. Even if Greece gets its next round of money the problem will not be solved and the issues will be pushed forward to disrupt the markets yet another day in the future.
On the other side of the Atlantic the US Federal Reserve convened their two day FOMC meeting as they attempt to figure out what action they may take to put a little spark in the US economy that seems to be heading for another bout of recession if it is not already there. Today the IMF came out with their latest on the global and US economy and in all cases they downgraded their projections for global GDP to 4% for 2011 and 2012 versus 4.3% and 4.5%, respectively versus their June forecast. In addition they lowered their growth projections for the US to 1.5% for 2011 from 2.5% versus their June projections. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said in its World Economic Outlook report today. In Europe “leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro” while in the U.S. “deep political divisions leave the course of U.S. policy highly uncertain.” The Washington-based IMF said it based its forecasts of a “modest pickup of activity” in advanced economies and of “robust growth” in emerging counterparts on the premise that European policy makers implement the measures to reinforce their bailout mechanism agreed on in July. It is kind of a good news, bad news forecast. Bad news suggests a weakening global economy...good news they are not yet forecasting a return to a recession in the developed world. Translated to oil demand growth this forecast should result in the forecasting agencies (IEA, EIA, OPEC) likely lowering their oil demand growth forecast when they issue their next monthly forecast in October.
Oil prices were able to hold onto their first set of gains in about three days as the market looks more and more like it is building in some sort of a positive response from the US Fed insofar as another new round of stimulus in some form. That form could be QE3, Operation Twist or something else that might be a surprise. But if nothing new comes out of the meeting (outcome will be 2:15 PM EST. on Wednesday) there will be a very strong round of selling hitting oil prices as well as most other risk asset markets. The Fed is under the gun to do something other than to take a position of observation. The market is looking for positive action.
The global equity markets were not as positive as the oil markets as we saw mixed results in the EMI Global Equity Index as shown in the following table. Ahead of the opening in Asia the Index has lost about 0.35% over the last twenty four hours widening the weekly loss to 1.2% as the year to date loss moves further into negative territory to 15.3%. Seven of the ten bourses in the Index continue to show double digit losses for 2011 with the US Dow still losing the least in the list of bourses while Paris holds the bottom spot in the Index. Most of the European bourses staged a modest short covering rally on news that Greece is making progress with its main lenders. The US market lost most of its earlier gains as we approached the close. At the moment the global equity market is still acting as a negative price driver for oil as well as the broader commodity complex as falling equity values are signaling further contractions in the global economy (as we saw forecasted by the IMF report).
The API data came in directionally in-line with most of the forecasts including mine. The API reported a modest build in crude oil inventories of about 2.6 million barrels... mostly all a result of the return back to normal of production and imports since TS Lee. The API reported only a small build for both gasoline and distillate fuel (right direction but below the estimates) even as refinery utilization rates increased by 0.5% or more than the expectations.
The market was expecting a more modest build in crude oil stocks and a larger build in gasoline and distillate fuel inventories this week. The report is overall neutral to slightly biased to the bearish side. The API reported a build of about 2.6 million barrels of crude oil with a 317,000 barrels decline in Cushing and a draw of 1.6 million barrels in PADD 2. The bulk of the build was in PADD 3 or the Gulf region all related to the recovery from TS Lee. On the week gasoline stocks increased by about 0.1 million barrels while distillate fuel stocks were built by about 0.1 million barrels. The refined products part of the report was also neutral.
With the financial and commodity markets still in a 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 EIA data will be released on Wednesday morning. I also want to caution that this week's report may see some recovery from the pre-emptive shutdowns that took place ahead of TS Lee. 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 recovery and return to more normal levels of US production and import levels.
My projections for this week’s inventory reports are summarized in the following table. I am expecting an across the board build in inventories and a small increase in refinery utilization rates which should result in a negative or mildly bearish weekly fundamental snapshot. I am expecting a modest build in crude oil stocks with an increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and a smaller build in distillate fuel stocks. I am expecting crude oil stocks to increase by about 1.2 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will still widen to about 10.8 million barrels while the overhang versus the five year average for the same week narrow to around 21.7 million barrels. My projection risk for crude oil is to the downside as stocks could have actually declined as the recovery for TS Lee could have been slower than anticipated (at least by me).
With refinery runs expected to increase by about 0.2% I am expecting a modest build in gasoline stocks even if demand is flat but imports possibly increased. Gasoline stocks are expected to build by about 1.1 million barrels which would result in the gasoline year over year deficit narrowing to around 14.2 million barrels while the deficit versus the five year average for the same week will move back to a small surplus of about 3.0 million barrels.
Distillate fuel is projected to increase modestly by 0.8 million barrels on a combination an increase in production and a possible decline in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 15.6 million barrels below last year while the overhang versus the five year average will widen to around 7.9 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 a similar situation with an across the board increase in inventories including 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.
Although the topical weather season has been active it has not had a major impact on oil and Nat Gas production in the Gulf of Mexico nor has it impacted prices very much. That said the tropics are back on the radar with now only one weather disturbances sitting in the eastern Atlantic. This weather pattern now has a 70% chance of strengthening into a tropical cyclone over the next forty eight hours. It is way too early to determine if either of these weather patterns will turn into threatening storms and wind up in the Gulf of Mexico but they warrant watching over the next several days.
For today I am keeping my view at neutral and moving my bias back to neutral. There are so many potential market moving events occurring this week that it is very difficult to be comfortable with a directional view for any time period other than the very short term. We are in a short term trading market that will likely see a high level of volatility and a high susceptibility for large intraday and day to day price reversals.
I am keeping my Nat Gas view at neutral and keeping my bias at cautiously bearish as there is little out there right now to support higher prices...
Currently as Asia gets set to start a new day of trading 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.
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Quote of the DayFear is pain arising from the anticipation of evil.
Aristotle
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
Email info@energyinstitution.org
Subscribe here Free Trial Here
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.
