Quote of the Day
It often requires more courage to dare to do right than to fear to do wrong.
I know it sounds repetitive but all risk asset markets continue to be impacted by the evolving sovereign debt issues in Europe and in particular as to how the leadership is going to come up with a long lasting and durable solution. Yesterday afternoon a story hit the media airwaves indicating that Germany and France were in agreement to leverage the ESFS bailout fund to upwards of €2 trillion...a kind of shock and awe number and potential solution to the problem. The story sent all risk assets markets up strongly but falling off a tad around the close in the US. Whether the story is real or not, it certainly shows that the markets are completely linked to all of the 30 second news snippets hitting the media airwaves out of Europe or about Europe.
On a negative note Moody's downgraded Spain (after the close in the US) with minimal impact on markets so far. In addition concern is building in the marketplace that France could also see its top rating downgraded which could impact the negotiations and ultimately the solution to the debt issues in the EU. The markets are fixated on a solution and the momentum is building for a solution to be announced at the EU summit in Brussels this Sunday. Even though Germany downgraded the expectations from the summit on Monday the market is trading like it is holding high expectations for a solution to be achieved that will be long lasting. That said with all of the dynamics that are at play (as mentioned above) getting to a solution in the short-term will be complicated and certainly not without risk.
For the rest of this week and into early next week the markets will remain mostly focused on all of the statements coming from the key players in Europe in the lead up to the Oct 23rd summit. As each day goes by the summit is taking on a greater and greater level of importance ...at least in the minds of the majority of the risk asset market players. Whatever the outcome is market players will likely start to refocus on the rest of the global economy next week sometime. Over the last several weeks the majority of the macroeconomic data that has hit the airwaves has been a tad better than expected which has resulted in moving the market sentiment a bit away from talk of a double dip recession in the developed world. In addition the view toward the emerging market world...in particular China is moving more toward a soft landing for their economy. So when the market moves its attention back to the rest of the global economy the reaction could turn out to be supportive if the macroeconomic data continues to slowly improve.
The global equity markets recovered most of the previous day's losses as shown in the EMI Global Equity Index table below. The Index narrowed its loss for the week to just 0.2% gaining about 1.5% over the last twenty four hours. Nine of the ten bourses in the Index gained ground with China the sole loser for today. The US Dow moved to break-even for the year after starting with a year to data gain earlier in the week. The Index is still below the bear market threshold of 20% loss for the year but as I have been discussing for months where the equity market heads from here will be dependent on the solution that emerges in Europe. For the short term the global equity markets are pricing in a solution and this has translated to being a positive for oil prices as well as the broader commodity complex.
The API data showed across the board declines in inventories (for the second week in a row) versus most projections calling for a mixed report...including my projections. The API reported a large draw in crude oil inventories of about 3.1 million barrels... with a modest decrease in imports and no change in refinery run rates. The API reported a modest draw in gasoline and a surprisingly large draw in distillate fuel as refinery utilization rates were unchanged versus an expectation for small decline.
The market was expecting a modest build in crude oil stocks and a modest draw in gasoline and distillate fuel inventories this week. The report is overall bullish but it has not resulted in any significant buying coming into the market since the data was released late yesterday afternoon. The market remains in the midst of another Europe led rally as discussed above with inventory data a secondary driver. The API reported a draw of about 3.1 million barrels of crude oil with a 0.6 million barrel build in Cushing and a draw of 0.7 million barrels in PADD 2 which is neutral for the Brent/WTI spread which is back on the defensive once again. The bulk of the draw was in PADD 3 or the Gulf region showing a decline of about 1.9 million barrels. On the week gasoline stocks decreased by about 1.6 million barrels while distillate fuel stocks drew by about 2.2 million barrels. The more widely watched EIA data will be released this morning after another bullish API report that the market has paid little if any attention to so far. Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today.
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 (driven by Europe)... 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 more widely watched EIA data will hit the media airwaves at 10:30 am EST today.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report with builds in crude oil and draws in refined products along with a marginal decrease in refinery utilization rates which should result in a mostly neutral 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 draw in gasoline inventories and 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 narrow to about 20.9 million barrels while the overhang versus the five year average for the same week will widen to around 9.4 million barrels.
With refinery runs expected to decrease by 0.2% I am expecting a modest draw in gasoline stocks as demand was likely flat at best last week. Gasoline stocks are expected to decline by about 1.0 million barrels which would result in the gasoline year over year deficit widening to around 9.6 million barrels while the surplus versus the five year average for the same week will switch back to a deficit of around 0.3 million barrels.
Distillate fuel is projected to decrease modestly by 1.2 million barrels on a combination a decrease in production and a possible increase in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.4 million barrels below last year while the overhang versus the five year average will remain around 3.5 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 still trading above the $85/bbl level I continue to maintain 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 continue to be bearish...especially around the G20 meeting coming up in early November. The oil complex has risen strongly over the last seven or eight trading sessions and is a bit overbought and due for a downside correction. As mentioned above I am starting to view the oil complex as moving back more toward a buy the dip pattern.
I am still bearish and do expect Nat Gas prices to once again move back and follow the downward underlying trend. I am also a firm believer that the market is always telling us what to do and how to trade it and yesterday the market told us it was still bearish and the action over the last several days was a temporary short covering move and not a change in the underlying bearish trend that has been in place for most of this year. The signal we were waiting for from the market came early on Tuesday when all around realized that the gains over the last several trading sessions were not sustainable and basically just short covering. Prices quickly came back to reality when the market realized that the only event currently on the agenda is likely to be yet another bearish inventory injection report on Thursday. As such I am moving my guidance back to cautiously bearish with a warning signal that we could be setting up for another buy the rumor, sell the fact move later in the week.
Currently as a new day of trading gets underway in the US markets are mixed as shown in the following table.
Dominick A. Chirichella
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