Quote of the Day
Change always comes bearing gifts.
Price Pritchett
Europe remains the main risk asset price driver but other things are happening around the world and some of these are also working their way into the mix as a market price driver. Overnight the Chinese government cut bank reserve requirements by 0.5% from Dec. 5 onward as China now seems to be moving toward an accommodative monetary policy. The move by China was welcomed in the market place as China now seems to be joining the developed world economies and slowly starting to stimulate the largest economic growth engine in the world.
Back to Europe... Finance Ministers agreed yesterday to guarantee as much as 30% of new bond sales from problem member countries to enhance the regions bailout fund and to enhance its ability to cap yields by also buying bonds. In addition the Finance Ministers are seeking a larger role for the IMF and the ECB in fighting the debt problems. Europe is continuing to move forward in trying to solve their debt issue problems with the market still somewhat skeptical that it is even a solvable problem in the short term. But at least for the moment the panic mentality has been somewhat abated. The cloud of uncertainty remains in place but it is not getting any larger at the moment.
The marginal improvement in Europe has resulted in global equity markets improving marginally on the week so far as shown in the EMI Global Equity Index table below. The Index is currently up 1.6% on the week as a result of modest rallies in the west. All bourses in the index remain in negative territory for the year with eight of the ten bourse still showing double digit losses. Three markets remain above the bear market threshold of 20%. Global equities are still mostly a negative driver for oil prices but as we have seen so far this week the momentum could be changing in the very short term.
On top of all of the economic issues around the world the geopolitical risk in and around the greater Middle East is continuing to widen as I have been discussing for the last several weeks. At the heart of the problem is the evolving nuclear situation in Iran and the ramifications of many direct and indirect actions slowly taking place by the west. A new round of sanctions by the US is moving forward that are designed to make it more difficult for Iran to receive payment on its crude oil sales. China, Japan and India along with the EU region are the main lifters of Iranian crude oil. In addition to the US sanctions the EU Foreign Ministers are meeting tomorrow to discuss the issue of Europe embargoing Iran crude oil from the region. Whether or not they will do it remains to be seen but if they do impose such an embargo I wholly expect the Saudi's to step up and replace those barrels for all of the reasons I have been discussing in the newsletter. I do not expect a major sustainable price spike in the event that the Europeans embargo Iran as Saudi oil will offset and solve the logistics. However, if the Saudi's do not step up to the table (I think a low probability) then of course we will see a price spike of some magnitude.
Even with protesters moving into the UK Embassy yesterday oil prices have been relatively calm with only a minimal risk premium currently embedded in the price. The fact that Iran and Syria have moved further into the forefront of events that could result in a potential supply disruption they will at a minimum keep a floor on any major price selling at this time. Also with the fragility of the global economy...especially Europe... along with the growing geopolitical risk in the Middle East, the Dec. 14 OPEC meeting is going to be very interesting to say the least. We will be talking more about this meeting as various sides start to send out their views in the media airwaves...those calling for a cut back to pre-Libyan civil war levels and those suggesting no change. I am of the view that there will be no change at this point in time especially with Brent still well over $100/bbl and WTI within shouting distance of a triple digit price level.
The API data was mixed and not in sync with most of the projections...including my projections. The API reported a large build in crude oil stocks versus an expectation for a modest build in crude oil inventories of about 3.4 million barrels as crude oil imports increased while refinery run rates also increased by 0.5%. The API reported a small draw in gasoline stocks versus projections for a modest build and a surprise build in distillate fuel inventories versus an expectation for a draw.
The market was expecting a small build in crude oil stocks and a modest build in gasoline inventories this week. The report is slightly bearish for crude oil and distillate fuel and somewhat neutral for gasoline. 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 3.4 million barrels of crude oil with a 0.4 million barrel draw in Cushing and a decline of about 0.9 million barrels in PADD 2 which is bearish for the Brent/WTI spread which has been somewhat range bound since the middle of November. On the week gasoline stocks decreased by about 0.2 million barrels while distillate fuel stocks built by about 1.3 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 a state 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 decrease 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 decrease 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 0.9 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 28 million barrels while the overhang versus the five year average for the same week will come in around 3.1 million barrels.
Even with refinery runs expected to decrease by 0.2% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by about 1.0 million barrels which would result in a gasoline year over year surplus of around 0.5 million barrels while the surplus versus the five year average for the same week will widen to around 1.7 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 26.1 million barrels below last year while the overhang versus the five year average will widen to around 10.5 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 pretty much the same directional moves as the projections for this week's inventory report. Thus based on my projections the comparison to last year will result in a minimal year over year change in inventories.
WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals and geopolitics I am keeping my view and bias at cautiously bullish. In addition the cloud of uncertainty got a tad smaller over the weekend in Europe but we will have to watch Europe closely as the sentiment could change on one or more negative news snippets at any time. WTI and Brent are once again back to being in sync with the direction of the US dollar and euro but are also being driven by the ongoing geopolitical situations in the middle east.
I am starting to turn a bit more positive to Nat Gas for the short term as discussed in detail above. Right now I would categorize the current market action as a market looking for a reason to move higher and it is starting to get some of that reason...a projection of more normal weather and a constructive technical viewpoint. I am moving my view and bias to cautiously bullish as I watch how price activity plays out over the next several trading session.
So where do we go from here? We still have mixed signals but more of the signals are currently biased to the upside. I am moving my view and bias to cautiously bullish as I believe a bearish injection is already built into the market...at least one that is in the lower half of the forecast range. Obviously a major injection will lead to another short term sell-off. Barring that I think the market is slowly moving into a mild uptrend and will remain in that pattern as long as the weather cooperates.
Currently as a new day of trading gets underway in the US, markets are mixed.
Dominick A Chirichella
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