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Yesterday was a relatively flat day for most risk asset markets as the majority of Monday's strong gains held in oil and equities. The big news coming out of Europe on Tuesday was the rejection of the expansion of the ESFS bailout fund by Slovakia, the second poorest nation in the 17 nation EU bloc and the only country to reject the expansion. However, the current view is the legislature will eventually approve the bailout proposal. As such the momentum moved toward a bit more optimism that the European leadership is inching closer to a longer lasting solution to its debt problems. The market is also viewing the bank recapitalization proposals as starting to gain momentum. So far most risk asset markets are continuing where they left off on Monday with gains in commodities & equities and a decline in the US dollar as the euro is strengthening once again.
With Europe seemingly progressing and with the macroeconomic data so far this week a tad better than expected... including Eurozone industrial output released this morning... equity markets are holding firm and oil prices (basis WTI) just passed another resistance plateau of $85/bbl. In spite of both the IEA and OPEC (see below for more details) lowering their forecast for oil demand growth the market is still holding onto modest gains.
On the equity front the EMI Global Equity Index has gained ground again as shown in the following table. Over the last 24 hours the Index gained almost 1% and is now higher by 2.8% on the week. The year to date loss is still below the bear market threshold showing a loss of 17.3%. The US Dow not only remains the best of the worst but it is now within 1.4% of moving back into positive territory for 2011. About two weeks ago the US market was bordering on double digit losses for the year. The market sentiment has started to change or at least it is considerably less negative than it was just a few weeks ago. The ability to continue to improve in value will be a direct function as to how the EU debt solution evolves over the next several weeks. For the moment global equities are a positive for oil prices as well as the broader commodity complex.
The IEA released their latest Oil Market Report this morning and for the third month in a row they lowered their forecast for oil demand growth based on a slowing global economy. Following are the highlights of the report.
Oil futures tracked latest economic developments amid the worsening European debt crisis, which triggered downward price moves throughout September. Prices partially recovered on renewed optimism that European leaders would address euro-zone financing issues, with WTI last trading at $84.50/bbl and Brent near $108/bbl.
Global oil demand is revised down by 50 kb/d for 2011 and by 210 kb/d for 2012 with lower-than-expected 3Q11 readings in the non-OECD and a downward adjustment to global GDP growth assumptions. Global GDP growth is now seen at 3.8% in 2011 and 3.9% in 2012 with significant downside risks. Demand estimates stand at 89.2 mb/d in 2011 (+1.0 mb/d y-o-y) and 90.5 mb/d in 2012 (+1.3 mb/d).
Global oil supply fell by 0.3 mb/d to 88.7 mb/d in September from August, due to non-OPEC outages. Non-OPEC supply projections are trimmed by 0.3 mb/d for 4Q11 and by 0.2 mb/d for 2012, with annual growth averaging 0.2 mb/d, to 52.8 mb/d, and 0.9 mb/d to 53.6 mb/d for 2011 and 2012 respectively. OPEC NGL output averages 5.9 mb/d in 2011 and 6.3 mb/d in 2012.
OPEC crude oil supply nudged down to 30.15 mb/d in September, with lower Saudi Arabian and Nigerian output partly offset by resumed Libyan supply. Output there reached 350 kb/d in early October and capacity is assumed at 600 kb/d by end-year. The 4Q11 ‘call on OPEC crude and stock change’ is adjusted up by 0.3 mb/d to 30.8 mb/d on lower non-OPEC supply, with the 2012 ‘call’ unchanged at 30.5 mb/d.
OECD industry oil stocks fell counter-seasonally in August by 3.4 mb to 2 692 mb, or 58.4 days of forward cover. Preliminary September data suggest a further 12.7 mb decline in OECD industry stocks and a drop in short-term floating storage. OECD stocks since July fell below the five‑year average for the first time since June 2008.
Global crude runs estimates for 3Q11 and 4Q11 are revised down by 50 kb/d and 75 kb/d respectively versus last month. Lower-than-expected Asian throughputs are partly offset by continued robust US runs. Global throughputs now average 75.5 mb/d in 3Q11 and 75.3 mb/d in 4Q11. Meanwhile, OECD refinery rationalization continues.
OPEC also released their latest oil market assessment. As did the IEA, OPEC reduced their projection for oil demand growth based on a slowing economic picture.
World economic growth remains unchanged at 3.6% in 2011 and has been revised down to 3.7% in 2012. At least for now, the deceleration of global output seems to have stabilized, although many risks remain, particularly in the Euro-zone. The US is forecast to grow at 1.6% in 2011 and at 1.8% in 2012. The Eurozone is now expected to expand by 1.6% in 2011, but by only 0.8% in 2012. Japan’s economy is expected to recover by 2.4% in 2012, after a contraction of 0.8% in 2011. However, the magnitude of the recovery remains uncertain. Growth levels in the developing countries remain relatively high, although a slow-down effect from the policy measures has started to have an impact. While China remains unchanged at 9.0% for 2011 and 8.5% for 2012, India’s forecast has been revised lower to 7.6% for both 2011 and 2012.
World oil demand growth has been revised down by 0.18 mb/d to show growth of 0.9 mb/d in 2011. Uncertainty in the world economy has dimmed the picture for 2011, particularly in the OECD region. Chinese oil demand is bound to uncertainty because of new government policies aimed at reducing transport fuel use. India’s increase in retail prices is expected to play a major role in dampening oil consumption in the coming year. Due to the weakening economic outlook, the forecast for world oil demand growth in 2012 has been revised down to stand at 1.2 mb/d.
Non-OPEC oil supply is forecast to increase by 0.4 mb/d in 2011, following a downward revision of 0.16 mb/d from the previous month, mainly due to lower-than-expected supply from Canada, the UK, Brazil, and Azerbaijan. In 2012, non-OPEC oil supply is expected to grow by 0.8 mb/d, higher than in the previous report, supported by anticipated growth in Brazil, Canada, Colombia, and the US. OPEC NGLs and nonconventional oils are expected to increase by 0.4 mb/d in 2012, in line with the current year’s growth. In September, total OPEC crude oil production averaged 29.90 mb/d according to secondary sources.
Sentiment in the product markets turned bearish, erasing the recovery of the previous months as product margins plummeted. Weaker demand throughout the driving season in the Atlantic basin and renewed concerns about economic developments in the Euro-zone helped to dampen market sentiment. In September, refinery margins showed a sharp drop of $3/b in the Atlantic basin.
The crude oil tanker market remained weak with spot freight rates for VLCCs, Suezmax and Aframax declining 5%, 3% and 8% respectively, as a result of higher tonnage supply and lower than-expected demand. Both East and West of Suez clean spot freight rates decline by 3% and 2% in September due to tonnage oversupply, lower tonnage requirements and limited arbitrage. OPEC spot fixtures increased 0.4 mb/d in September to average 11.5 mb/d mainly from the Middle East. OPEC sailings remained nearly steady with only a minor increase.
US commercial oil inventories fell by 13.4 mb in September. This drop was attributed solely to crude, which declined by 16.8 mb, while product inventories rose 3.4 mb. Despite the draw, total US commercial oil inventories stood broadly in line with the five-year average. In Japan, the most recent monthly data for August shows that commercial oil inventories fell by 1.4 mb. The draw was attributed to a 6.9 mb decline in crude, as product stocks rose 5.5 mb.
The demand for OPEC crude in 2011 is estimated at 29.9 mb/d, unchanged from the previous assessment and around 0.1 mb/d higher than last year. In 2012, the demand for OPEC crude is projected to average 29.9 mb/d, representing a downward revision of 0.1 mb/d compared to the previous report and no growth over the current year.
Later today the EIA will release their Winter Outlook in conjunction with their Short Term Energy Outlook Report. Based on both the IEA and OPEC reports I would now also expect the EIA to lower their projection for global oil demand growth.
With Europe still in a state of turmoil and uncertainty it is not clear if this week's oil inventory reports will have any major impact on price direction. At the moment all market participants are continuing to follow the tick by tick direction of equities and the US dollar... as they are both the primary price drivers for oil. As such this week's oil inventory report is likely to remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report. The normal weekly reports get underway late tomorrow afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Thursday morning. The data has been delayed one day due to the Columbus Day holiday in the US on Monday.
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 decrease 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 a decrease 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 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 22.2 million barrels while the overhang versus the five year average for the same week will narrow to around 8.1 million barrels.
With refinery runs expected to decrease by just 0.2% 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 0.8 million barrels which would result in the gasoline year over year deficit narrowing to around 3.6 million barrels while the surplus versus the five year average for the same week will also narrow to about 5.6 million barrels.
Distillate fuel is projected to increase modestly by 0.2 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 15.1 million barrels below last year while the overhang versus the five year average will remain around 7.8 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 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 modest level of restocking for crude oil and gasoline but distillate fuel oil stock would remain steady versus last year for the same week.
With WTI now trading above the $85/bbl level I will keep my bias on the bullish side with a caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data due out this week is negative or if any of the 30 second news snippets surrounding Europe are bearish.
With the short term weather forecast a tad less bearish than it has been the market mounted a decent short covering rally on Tuesday pushing prices just above the $3.61/mmbtu resistance level. The market has been very oversold and the current rally can only be categorized as s short covering rally and not a major shift in the underlying trend. Depending on the EIA/NOAA winter outlook to be released later today the market could react one way or the other. As such I am moving my view back to neutral.
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
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