Quote of the Day
Freedom lies in being bold.
Robert Frost
Yesterday's massive risk asset sell-off was all about Greece first scheduling a referendum to vote on the EU bailout plan by the population and then an indication that the referendum vote was off. First it continues to be all about Europe as I have been discussing followed by the 30 second news snippets that have been rocking the market and causing an extremely high level of volatility in oil, equities and most other commodity market values. As mentioned yesterday the next big event (unless another surprise emerges from Europe today) will be the G20 meeting beginning on Nov. 3 in France. Europe is certain to be at the top of the agenda as will discussions as to what will evolve with Greece. There will also be meetings today between key European leaders and Greek Prime Minister Papandreou which is certain to result in more market moving news snippets hitting the media airwaves.
In addition to Greece the macroeconomic data this week...especially the manufacturing data....has underperformed versus expectations as well as last month's data. A slowing of the recovering in manufacturing is a negative for oil consumption as well as most other commodity consumption levels. Today the pre-jobs data starts to hit the media airwaves with the Challenger layoff report and ADP private sector job survey. Also at 2:15 PM EST the results of the US Federal Reserve FOMC meeting will be announced with all eyes and ears focused on the Fed's intent (or non-intent) on quantitative easing. Needless to say today's trading sessions will be volatile and reactive to the macroeconomic data, the Fed and anything that may come out of the meetings in Europe with the Greek Prime minister.
The Greek escapade had a strong negative impact on not only on oil and other commodity values but also on the global equity markets as shown in the EMI Global Equity table below. The Index is now down 3.3% on the week and has given back more than half of last week's 5.8% gain. The US Dow is barely holding on to its year to date gain of just 0.7% with seven of the 10 bourses back to showing double digit losses for the year. It is very difficult for investor/traders to get very comfortable with the equity markets as the situation in Europe is continuing to unfold and the cloud of uncertainty enveloping the global economies is continuing to widen.
The API data was mixed and directionally a tad out of sync with most of the projections...including my projections. The API reported a small draw in crude oil stocks versus an expectation for a build in crude oil inventories of about 0.9 million barrels as crude oil imports decreased by about 500,000 barrels per day while refinery run rates increased by 0.4%. The API reported a smaller than expected draw in gasoline stocks and a much larger than expected decline in distillate fuel inventories.
The market was expecting a small build in crude oil stocks and a modest draw in gasoline and distillate fuel inventories this week. The report is slightly bullish but it has not resulted in any major price action coming into the market since the data was released late yesterday afternoon. The market remains hostage to the outcome of the European soap opera that has been unfolding so far this week as discussed above with inventory data a secondary driver. The API reported a draw of about 0.2 million barrels of crude oil with a 0.1 million barrel draw in Cushing and a draw of about 0.2 million barrels in PADD 2 which is neutral to bearish for the Brent/WTI spread, which has been on the defensive. The bulk of the draw was in PADD 3 or the Gulf region showing a decrease of about 2.6 million barrels. On the week gasoline stocks decreased by about 1.1 million barrels while distillate fuel stocks drew by about 3.4 million barrels. The more widely watched EIA data will be released this morning. 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.
I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe is now back into a state of turmoil and uncertainty suggesting that this week's oil inventory reports will not likely have a 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 once again. 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 be released later this morning.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report with a build 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 small 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 0.9 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 27.7 million barrels while the overhang versus the five year average for the same week will also widen to around 5.6 million barrels.
With refinery runs expected to decrease by 0.1% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decline by about 1.8 million barrels which would result in the gasoline year over year deficit narrowing to around 11.8 million barrels while the deficit versus the five year average for the same week will widen to around 5.8 million barrels.
Distillate fuel is projected to decrease modestly by 1.0 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 24 million barrels below last year while the overhang versus the five year average will widen to around 3.4 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 mixed report with a modest build in crude oil and a seasonal draw in gasoline and distillate fuel. Thus based on my projections the comparison to last year will result in a modest level of restocking for crude oil but a destocking for both distillate fuel oil and gasoline inventories.
Although WTI still trading above the $91/bbl level I have to maintain my view at neutral with my bias now toward the bearish side of the equation. As discussed above the EU is still a mess while global manufacturing data is starting to come in below expectations. That said WTI is going to have to breech the $90 to $91/bbl level in order for oil to be back in a short term downtrend. For now although I am still on the bearish side I once again do not like the risk/reward in the oil market and prefer the sidelines today until all of the news around Europe is digested.
Although I am still bearish I am not expecting Nat Gas prices to fall precipitously over the short term (next few days). However, yesterday's trading session was a bit interesting in that futures prices made a few passes at breaching a key support level which if it is breached over the next several sessions it would put Nat Gas futures back into a mode of possibly testing the 2011 low for the year. I am still keeping my guidance at neutral but moving my bias back to bearish also to see how price activity plays out over the next several trading session. I must say in looking at the fundamentals it is still hard to be anything other than bearish.
Nat Gas futures were weak all day as was most of the cash markets around the US. Nat Gas ended the open outcry session pretty much near its lows for the session. The spot Dec contract did make a few attempts at penetrating the key technical support level of around $3.76/mmbtu but failed to breach this level. On the other hand it seems we will be winding down trading much closer to the support level than the resistance level and as such I would continue to call Nat Gas bearish even though the market does not want to go back down to the level where it is more fairly valued...in the $3.50 to $3.60/mmbtu range just yet. The Nat Gas markets remain solidly in the shoulder season with no weather related demand to speak of nor anything that would justify Nat Gas prices holding even at the current level they are at after today's modest sell-off. I am starting to think the market is sending another message and this time the message may be more bearish than it has been over the last several weeks.
Currently as a new day of trading gets underway in the US markets are marginally higher as shown in the following table.
Dominick A. Chirichella
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