Quote of the Day
When words leave off, music begins.
Heinrich Heine
The short covering rally not only continued throughout Tuesday's trading session but the upside momentum actually increased during the course of the trading day. The same was not exactly true for the equity markets which peaked in value well before the close. At one point the US Dow was up well over three hundred points on the day but settled well off of the highs for the day suggesting that most market participants still have very little confidence that the end of the downturn is over just yet. That said most all risk asset markets gained value today and that is a far cry from the daily performance taking place just a week ago.
The main impetus for today's rally was driven by positive news coming out of Europe as my main question/concern discussed in Tuesday's newsletter was starting to get a partial answer and that involved adding more liquidity to the EFSF (European Financial Stability Fund) for use in bridging the gap during the evolving sovereign debt issues. It is still not a permanent and long term solution but it is one step in the right direction that helped to clear some of the uncertainty that is continuing to cloud Europe. Further helping to support today's short covering rally was a small bump up in US consumer confidence and a rise in home prices.
As I elaborated in Tuesday's newsletter a lot of questions (besides those around just Europe) will have to be answered before there will be enough confidence that a trend will remain in place for more than a day or so. In addition the way the market traded today also highlights that most market players have a very short time horizon for the majority of their risk asset trading...especially when trading from the long side. What we have learned so far is all of the up moves have been short covering rallies and market participants are very reluctant to keep any long positions on for any length of time especially those on the financial side of the market. Continue to stay short term until more of the questions are answered and also remain diligent in employing tight, trailing stops in all of your trading as there are likely to be many more days like today when big gains disappear pretty quickly.
The global equity markets were a positive for the oil markets for most of the US session. However by the time the close rolled around the US equity markets gave back more than half of their earlier gains as most players booked profit and went to sidelines as they still deem the overnight risk to be well greater than the potential reward. The US markets ended the day in positive territory and the EMI Global Equity Index gained ground as well as shown in the following table. Ahead of the opening in Asia the Index has gained about 2.5% over the last 24 hours widening the weekly gain to 2.5% as the year to date loss narrowed to 17.6% and remains below the bear market threshold of 20%. Nine of the ten bourses in the Index continue to show double digit losses for 2011 with the US Dow is still losing the least in the list of bourses while Hong Kong holds the bottom spot in the Index. Most of the European bourses staged a strong short covering rally on news that the EU is making progress. The US market lost a portion of its earlier gains as we approached the close. At the moment the global equity market are still acting as a short term positive price driver for oil prices as well as the broader commodity complex.
The API data came in mixed when compared to most of the forecasts including mine. The API reported a smaller than expected build in crude oil inventories of about 0.6 million barrels... mostly all a result of the return back to normal of production and imports since TS Lee. The API reported significant build for gasoline and a surprise small draw in distillate fuel even as refinery utilization rates increased by 1.5% or more than the expectations.
The market was expecting a more modest build in crude oil stocks and a smaller 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 0.6 million barrels of crude oil with a 1.02 million barrel decline in Cushing and a draw of 1.2 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 4.6 million barrels while distillate fuel stocks were drew by about 0.2 million barrels.
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 or if it will continue to be a secondary price driver. The more widely watched EIA data will be released on Wednesday morning. I also want to caution that this week's data may still see some recovery from the pre-emptive shutdowns that took place ahead of TS Lee several weeks ago. The data could still 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 based on the fact that US Gulf operations were normal all of last week (the report window).
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 marginal 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 larger build in distillate fuel stocks. I am expecting crude oil stocks to increase 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 still widen to about 16.8 million barrels while the overhang versus the five year average for the same week narrow to around 13.6 million barrels. My projection risk for crude oil is to the downside as stocks could have actually declined strongly over the last few weeks.
With refinery runs expected to increase by just 0.1% I am expecting a modest build in gasoline stocks as demand was likely flat at best last week. Gasoline stocks are expected to build by about 1.0 million barrels which would result in the gasoline year over year deficit narrowing to around 7.5 million barrels while the deficit versus the five year average for the same week will continue showing a modest surplus of about 6.2 million barrels.
Distillate fuel is projected to increase modestly by 1.4 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 14.6 million barrels below last year while the overhang versus the five year average will remain around 8.0 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 decline in inventories including a strong decrease in refinery run rates. Thus based on my projections the comparison to last year will result in a restocking of inventories this year versus both last year and the five year average. As such I do expect modest changes in the year over year status if the actual numbers are in line with my projections.
Tropical Storm Ophelia is starting to energize once again and has now been upgraded to a weather disturbance that has a 90% chance of strengthening back into a tropical storm over the next 48 hours. It is still located north of the Leeward Islands. Further out in the eastern Atlantic is TS Philippe which is currently projected to head into the northern Atlantic pretty early on its life and pose no threat to the US. At the moment the tropics are definitely not a threat to oil or Nat Gas operations in the US or anyplace else for that matter.
For today I still have a bearish view as I said before. That said we are clearly in the midst of a short covering rally so for the very short term I have to make my bias neutral with one eye still toward further moves to the downside unless the answers to some of my key questions begin to emerge more toward the positive.
I am also keeping my Nat Gas bias back to neutral as this commodity is also in the midst of a short covering rally supported by a more bullish set of short term weather forecasts. That said there is currently not much more out there that suggests Nat Gas prices are ready for a major move to the upside.
Currently as a new day of trading gets underway in Asia 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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