Quote of the Day
Leadership is action, not position.
Donald H. McGannon
The ongoing saga continues in Europe continues but today it is Italy that is driving the value of everything lower including oil prices. In spite of Berlusconi's planned exit from power, Italy is facing more turbulence as its debt yields soar and one of the main clearing houses raised margin requirements on Italian debt. Yet another dangerous and fluid situation going on in Europe, even as the Greek situation continues to unfold with a new Prime Minister yet to be named. The European cloud of uncertainty is yet again spreading and dominating the global market sentiment. It really does not matter much what else happens outside Europe in terms of economic data or fundamentals as every other risk asset market driver has taken a back seat to Europe once again.
For example in China overnight the latest data on inflation showed significant cooling in October, with the government reporting Wednesday that the consumer price index rose 5.5% from a year earlier, while producer price inflation dropped sharply to 5%. The CPI result compared to a 6.1% year-on-year rise in September. The October number matched a Reuters forecast and was slightly above a 5.4% projection from Dow Jones Newswires. The easing in wholesale inflation was far more dramatic, easing from September's 6.5%, and below respective forecasts of 5.7% and 5.8% from Reuters and Dow Jones Newswires. This is a positive for oil and other commodity markets as it suggests that the Chinese government may begin to move from a tight monetary policy to a more accommodative one which in turn would foster growth and thus oil and commodity consumption. Under more normal circumstances this data out of China would have resulted in an increase in oil prices, rather the EU/Italy/Greece situation has pushed oil prices down by over $1/bbl as of this writing.
After staging a modest recovery in equity values during Tuesday's US trading session and carrying through to Asia, the global equity markets are back on the defensive in Europe as shown in the EMI Global Equity Index table below. The Index is still up by 0.4% on the week but those gains are likely to disappear quickly as US equity futures are pointing to a sharply lower opening on Wall Street this morning. The so called risk-on/risk-off trade is not only cycling frequently through equities and other risk asset markets, it is occurring intraday raising volatility to above normal high levels. The pattern in equities is as difficult to glean as any other risk asset. For the moment equities are once again a negative for oil prices.
Yesterday the EIA released their latest Short Term Energy Outlook. Following are some of the main highlights from the report directly related to the Oil markets.
EIA’s U.S. and world economic growth assumptions have been lowered from last month’s Outlook. World oil-consumption-weighted real GDP grows by 3.1 percent in 2012, compared with 3.5 percent in the previous Outlook.
Oil prices continue to face upward price pressure because of supply uncertainty resulting from ongoing unrest in the oil-producing regions of the Middle East and North Africa. However, there may be downward price pressure if Libya is able to ramp up oil production and exports sooner than anticipated. At the same time, downside demand risks continue as fears persist about weakening global economic growth, contagion effects of the debt crisis in the European Union, and other fiscal issues facing national governments.
Given expected rates of global oil consumption growth, the engine for which will be emerging markets outside of the Organization for Economic Cooperation and Development (OECD), a combination of increased oil output from members of the Organization of the Petroleum Exporting Countries (OPEC) and inventory withdrawals will need to supplement non-OPEC supply growth in order for the oil market to balance at the prices projected in this Outlook.
EIA expects that world crude oil and liquid fuels consumption will grow from its record-high level of 87.1 million barrels per day (bbl/d) in 2010 to 88.2 million bbl/d in 2011 and 89.6 million bbl/d in 2012 (World Liquid Fuels Consumption Chart). China and other emerging economies account for all of the projected crude oil and liquid fuels consumption growth through 2012. Consumption in member countries of the OECD is projected to decline by 0.4 million bbl/d in 2011 and to remain relatively flat in 2012.
EIA projects that non-OPEC liquid fuels production will grow by 0.4 million bbl/d in 2011 and 1.1 million bbl/d in 2012, to an average of 53.3 million bbl/d next year (Non-OPEC Crude Oil and Liquid Fuels Production Growth Chart). The largest sources of expected growth in non-OPEC oil production over the forecast period are Canada, China, Colombia, Kazakhstan and the United States, with average annual growth in each country of over 100 thousand bbl/d. In contrast, forecast Russian and Mexican projected production is lower at the end of the forecast period. Regional turmoil, particularly in Syria and Yemen, exerts additional pressure on the non-OPEC outlook and on global oil prices.
While forecast OPEC non-crude liquids production, which is not subject to production targets, is expected to increase by 0.4 million bbl/d in 2011 and by 0.5 million bbl/d in 2012, EIA expects OPEC crude oil production to remain flat in both 2011 and in 2012, after having grown by 0.7 million bbl/d in 2010. Libyan oil exports resumed at the end of September, averaging about 0.2 million bbl/d. EIA expects Libyan crude oil exports to rise to 0.35 million bbl/d during the first quarter of 2012 and to 0.8 million bbl/d by the end of 2012, compared with pre-disruption exports of 1.5 million bbl/d. OPEC surplus crude oil production capacity falls from 3.5 million bbl/d in the fourth quarter of 2010 to a projected 3.0 million bbl/d in the fourth quarter of 2011, but then increases to 4.0 million bbl/d in the fourth quarter of 2012, as Libyan production capacity comes back on line, freeing up capacity in other OPEC countries.
EIA expects that OECD commercial inventories will decline in both 2011 and 2012. However, because of declining consumption, days of supply (total inventories divided by average daily consumption) falls slightly, from 57.7 days to 57.4 days between the fourth quarters of 2011 and 2012
The API data was mixed but directionally in sync with most of the projections...including my projections. The API reported a small draw in crude oil stocks versus an expectation for a more modest build in crude oil inventories of about 0.1 million barrels as crude oil imports decreased by about 130,000 barrels per day while refinery run rates decreased by 1.9%. The API reported a larger 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 once again this week as discussed above with inventory data a secondary driver. The API reported a draw of about 0.1 million barrels of crude oil with a 0.9 million barrel draw in Cushing and a build of about 0.1 million barrels in PADD 2 which is neutral to for the Brent/WTI spread which has been widening of late. The bulk of the draw was in PADD 3 or the Gulf region showing a decrease of about 1.3 million barrels. On the week gasoline stocks decreased by about 1.5 million barrels while distillate fuel stocks drew by about 2.9 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.
Once again 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 in a state of turmoil and uncertainty suggesting that this week's oil inventory reports may not 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. Although as discussed above the fundamentals and geopolitics are starting to also impact price. As such this week's oil inventory report could 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.
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 0.5 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 28.2 million barrels while the overhang versus the five-year average for the same week will also widen to around 7.5 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 0.5 million barrels which would result in the gasoline year over year deficit narrowing to around 6.5 million barrels while the deficit versus the five year average for the same week will narrow to around 3.1 million barrels.
Distillate fuel is projected to decrease modestly by 1.5 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 28.5 million barrels below last year while the overhang versus the five year average will widen to around 7.2 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 a build in distillate fuel. Thus based on my projections the comparison to last year will result in a modest level of destocking for crude oil and distillate fuel oil inventories.
WTI is now trading above another key technical resistance level of the mid- $94's/bbl and along with the changing fundamentals I am still keeping my view and bias at cautiously bullish even with the cloud of uncertainty increasing in Europe today. The situation in the EU is still in turmoil but some progress could come this week. That said WTI & Brent will remain closely linked to the direction of the US dollar and the Euro and will remain in this pattern for the foreseeable future. The US dollar and euro will both be impacted strongly by the outcome of the EU/Greece and now Italy situations and as such oil prices will respond accordingly.
I am still bearish and am becoming more convinced that there is more downside in the price of Nat Gas. Right now I would categorize the current market action as another range bound with a downside bias. I am still keeping my guidance at neutral and keeping my bias at 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.
As has been the case for weeks, Nat Gas prices remain in a wide trading range as I have been discussing for the last several weeks. Each time it looks like Nat Gas futures are ready to completely break down and push to a test of the year to lows made a few months ago a modest level of bottom picking tends to reverse the trend as we saw happen once again today. The bottom picking buying pushed prices by about 1.8% on the session leaving the market hovering around the key technical support/resistance level. There are no strong drivers to currently justify higher prices as just about everything that is out there is mostly bearish including today's latest Short Term Energy Outlook report released by the EIA. The only thing holding prices up in my view is the belief that we are at the point of time of forming a seasonal low in prices. That said as I discussed in yesterday's newsletter the market could be surprised if the weather continues to be as mild as it has been in that injections could continue for a longer than historical normal timeframe this year.
Currently as a new day of trading gets underway in the US markets are lower 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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