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Europe and the US continue to drive the market lower. Yesterday the second reading of 3rd quarter GDP in the US was revised downward by 0.5% to 2% growth but the market was expecting an unchanged level from the first reading and as such yet another negative market indicator. Also in the latest FOMC notes from the last US Fed meeting the Fed indicated that they do not expect a double dip recession but they do expect slow growth. They also indicated that they discussed additional stimulus to jump start the economy as well as adding another measure to their objectives...GDP.
Europe simply continues to disappoint the market on all levels. Today the latest gauge of European services and manufacturing output declined for the third month in a row as the sovereign debt problems and installation of austerity programs moves this sector of the world closer to another recession. Add a bit of fuel to the negative fire this morning the latest German Bund auction was under subscribed as even the solid countries are now being put in question by the bond market. The net result is all risk asset markets remain in sell-off mode including the oil complex.
Global equity markets are continuing to lose value as shown in the EMI Global Equity Index table below. The Index is now down 1.7% on the week widening the year to date loss to 17.3%. All bourses are in negative territory...including the US... with the remaining nine burses now showing double digit losses. The Index is now less than 3% below the bear market threshold of 20%. The equity markets are reflective of the tremendous amount of negative sentiment coming from Europe and a bit from the disappointing GDP result out of the US yesterday.
The API data was mixed and not in sync with most of the projections...including my projections. The API reported a huge draw in crude oil stocks versus an expectation for a modest build in crude oil inventories of about 5.6 million barrels as crude oil imports decreased marginally while refinery run rates also decreased by 0.5%. The API reported a much larger than expected build in gasoline stocks and a decline in distillate fuel inventories within the expectations.
The market was expecting a small build in crude oil stocks and a modest build in gasoline inventories this week. The report is slightly bullish for crude oil but neutral to bearish for refined products. That said the report 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 evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver. The API reported a draw of about 5.6 million barrels of crude oil with a 0.8 million barrel build in Cushing and a build of about 1.2 million barrels in PADD 2 which is neutral to bullish for the Brent/WTI spread which has been widening of late. On the week gasoline stocks increased by about 5.4 million barrels while distillate fuel stocks drew by about 0.9 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 and the US are still in the midst of 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. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. 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 marginal increase in refinery utilization rates which should result in a neutral weekly fundamental snapshot. I am expecting a modest build in crude oil stocks with a slight increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and another draw in 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 narrow to about 21.1 million barrels while the overhang versus the five year average for the same week will also narrow to around 3.1 million barrels.
With refinery runs expected to increase by 0.1% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by about 0.5 million barrels which would result in the gasoline year over year deficit narrowing to around 4.3 million barrels while the deficit versus the five year average for the same week will narrow to around 3.2 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 25.6 million barrels below last year while the overhang versus the five year average will widen to around 10.6 million barrels.
Some of the early forecasters of inventories in Cushing (determined by fly over's) are expecting a small build in crude oil stocks in that region of the US. For reference current inventory levels in PADD 2 (as of last week) are at 91.5 million barrels while last year stocks were at 91.8 million barrels (based on the comparable week that will be reported this week). Cushing stocks are currently at 32.029 million barrels compared to last year at 33.6 million barrels. In both instances current stocks are a tad below last year at this time when the Brent/WTI spread was trading around $2/bbl premium to Brent. Needless to say I still view the current spread to be overvalued with further retracement yet to come.
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 draw that was larger than the current projections for this year. Thus based on my projections the comparison to last year will result in a modest level of restocking for crude oil and distillate fuel oil inventories.
Even with WTI still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals I am keeping my view and bias at neutral as the cloud of uncertainty remains in Europe and is now growing around the lack of a US deficit cutting deal. WTI & Brent are once again back to being in sync with the direction of the US dollar and euro and moving tick for tick with those markets at the moment.
I am still bearish Nat Gas and unless some real winter heating demand begins to take hold prices could fall further in the short term. Right now I would categorize the current market action as a market looking for a reason to move higher. I am keeping my view and bias at neutral as I watch how price activity plays out over the next several trading session.
Each time there is a little short covering rally in Nat Gas the market is quickly reminded that the overall situation for Nat Gas from a fundamental perspective is still bearish. Supply continues to outstrip demand as the onset of winter weather has been slow to arrive this shoulder season. Yes there have been patches of cold weather in various parts of the US but for the moist part the majority of the cold weather seen has been low population areas and thus not large Nat Gas consuming regions of the US. Look down the road the latest six to ten day and eight to fourteen day temperature forecast from NOAA is still showing a major portion of the US expecting above normal temperatures for the rest of Nov and into early December.
Looking further down the road WSI in their latest winter weather forecast is calling for a warmer winter this year than last. They are expecting heating fuel demand to be lower by about 7.5% for the December through February period or what I like to call the heart of the winter heating season. This is in the same direction as the NOAA winter forecast issued in late October but WSI is projecting a but warmer period than NOAA. That said both forecasts are expecting the winter to be a bit colder than normal or the 30 year average. With supply even more robust this year versus last year and total Nat Gas in inventory now above last year and at another new all time record high and expectations for a major upside spike in prices during the winter is looking less likely unless the actual winter weather is noticeably colder that the expectations.
As I have been saying for the last week or so Nat Gas prices have been holding up relatively well while everything around this market remains bearish. I still believe the reason is driven by the risk/reward of being short versus waiting for the next trend to trade is what is keeping the shorts on the sidelines except for those trading the market from the very short term. In addition with the bottom pickers/seasonal traders growing in size resulting in their impact when they jump in on anything that is remotely bullish. As such I remain neutral for the short term and will revisit my view once I see how the market digests the upcoming injection data as well as the weather.
Currently as a new day of trading gets underway in the US markets are lower.
Dominick A. Chirichella
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