Quote of the Day
Life has no limitations, except the ones you make.
In U.S. trading yesterday the markets experienced a pretty strong price reversal as short covering took control during the later part of the trading session. The short covering rally was led by a turnaround in the USD and equity markets which carried through to the oil complex after WTI dipped below $75/bbl on an intraday basis and bounced off of a key technical support level. That said the rally in US equity markets did not follow throughout all of the global equity markets (see below for more details) strongly suggesting that the upward move on Tuesday was more about short covering and not about any change in the underlying trend for most risk asset markets which remains to the downside. One slightly positive note for WTI is prices are above the low made in early August and could be forming a double bottom. Again it is much too early to say with any degree of confidence that oil prices have bottomed at the moment.
The US dollar Index is still in negative territory for the session and that coupled with a bullish API oil inventory report is keeping both Brent and WTI in positive territory ahead of the more widely followed EIA oil inventory report to be released at 10:30 AM EST. A news story out of Saudi Arabia yesterday got a bit lost in the overall noise that was permeating throughout the market. There were reports of clashes that injured 14 people in the oil rich eastern province (mostly Shiite population) that the Saudi government indicated was the work of an un-named foreign power...which is normally the code used by the Saudi's to indicate Iran as being the un-named country. The last time any issues arose in Saudi Arabia were back in March but were put down pretty quickly. So far this is not a big deal but certainly with the way the democracy revolution has evolved in other MENA countries, this is worth watching and putting Saudi Arabia back on the radar.
As demonstrated once again in yesterday's trading sessions (and into today so far) the external markets (currencies and equities) continue to be the main price drivers for the oil complex. All of the questions and concerns I have raised in the newsletter over the last week have not changed with the sovereign debt issues in Europe...or should I say the lack of a long lasting solution to the European debt problems so far...continues to be the main negative clouding overall risk asset markets. The next big event in Europe will come in the second half of November when the G20 meets again and is expecting to hear how Europe will once and for all solve the debt problems (hopefully).
This is not to say that the contracting economy in the US is not a big negative also but for the moment the market views Europe as a bigger problem. The market got a little more confidence knowing that at least someone is actually worry about the economy in the US as the Washington, DC politicians continue to position themselves for next year's elections. Fed Chairman Bernanke in his remarks to Congress yesterday indicated that the Fed would get even more aggressive if the economy warranted such action. The economy warranting more aggressive action could come sooner than later as the market awaits another snapshot of the horrible unemployment situation in the US on Friday morning with some of the pre-jobs reports hitting the media airwaves as early as this morning ...ADP data today and initial jobless claims tomorrow morning. These pre-reports have also been market movers of late and with some mediocre macroeconomic data coming out of Europe today any negativity will quickly derail the ongoing short covering rally. Overall the externals still point to a further slowing of the global economy.
The rally in US equities did not move uniformly around the globe as shown in the EMI Global Equity Index table below. In spite of a bit of a recovery in some bourses the EMI Index still lost about 0.23% over the last twenty four hours and remains in bear market territory for the year to date with a 23% loss. As has been the case all year the US Dow remains the only bourse in the Index that is not showing a double digit loss for the year or better put it remains the best of the worst. In the very short term with the US dollar in retreat and Europe and US equity futures now higher the externals are a positive for oil prices at the moment. That said the underlying trend still remains bearish.
The API data showed across the board declines in inventories versus most projections calling for an across the board build...including my projections. The API reported a large draw in crude oil inventories of about 3.1 million barrels... even with only a modest decline in imports and a 1% decline in refinery run rates. The API reported a significant draw in gasoline and a surprise draw in distillate fuel as refinery utilization rates decreased by 1.0% or more than the expectations.
The market was expecting a modest build in crude oil stocks and a smaller build in gasoline and distillate fuel inventories this week. The report is overall bullish and it has resulted in some light buying coming into the market since the data was released late yesterday afternoon. The API reported a draw of about 3.1 million barrels of crude oil with a 0.9 million barrel decline in Cushing and a draw of 0.5 million barrels in PADD 2 which is a negative for the Brent/WTI spread which continues to slowly retrace today. The bulk of the draw was in PADD 3 or the Gulf region showing a decline of about 5 million barrels. On the week gasoline stocks decreased by about 5.0 million barrels while distillate fuel stocks drew by about 2.0 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.
For today I still have a bearish view as everything I look at and have discussed today and over the last week has not changed my view or the market conditions one bit. The market remains in a short to medium term downtrend and continues trading around the 30 second news snippets coming out of Europe. However, we are once again in a short covering rally mode which seems to happen almost every week only to see values sold into by the end of each week. So although I am still categorizing my view as bearish I will suggest that a bullish EIA report could support the rally even further. Bottom line I would still consider the medium term trend to be bearish until WTI prices are trading above the $80/bbl level on a sustainable basis.
With the short term weather forecast less of a bullish factor and with a forecast for yet another bearish EIA inventory report I have to keep my drivers at bearish. I know it sounds somewhat boring but it is very difficult to find something overly interesting to suggest the next price direction for Nat Gas for the short term...other than most likely lower. The only potential price driver will be Thursday's weekly EIA inventory injection report assuming the actual data is out of the range of the projections.
Currently as a new day of trading gets underway in the US 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.
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.