Quote of the Day
Adopt the pace of nature: her secret is patience.
Ralph Waldo Emerson
A quiet trading session on Tuesday led to a relatively quiet trading so far this morning. The main features of the market are still Europe, China and a sprinkle of geopolitics in and around the Middle East. All have been impacting oil prices as well as most risk asset markets. Starting with Europe the news is mostly positive as the negotiations with the Greek lenders are looking like they will result in a resolution and Greece will not default on its obligations. In addition the market is viewing the IMF's comments that they want to increase their lending fund to $1 trillion dollars as another positive. Whether or not the IMF will be able to achieve this objective is a whole different story in my view especially because the US is a major contributor to the IMF and the US is facing its own budget & spending issues. At least for today this news is acting as a positive for the euro and leading a rally in European and global equities and commodities.
There is not much new news out of China except for the Chinese government is allowing five of its largest banks to increase lending by 5% to help jump start the economy. All of the news and sentiment surrounding China suggest that the government is going to continue to expand its efforts to get its economy growing at more near historical levels and this action will involve lowering bank capital reserve requirements as well as short-term interest rates at some point in time. Also I would not be surprised to see some sort of stimulus program directed to the internal economy. This overall mentality that China is so far achieving a soft landing and changing their monetary strategy is serving as an underlying positive for oil and many traditional commodities.
Global equity markets are continuing to gain ground as shown in the EMI Global Equity Index table below. The EMI Index has gained 1.9% on the week resulting in the year to date gain widening to 5.2%. Germany is soaring higher and holding the top spot with an 8% gain on the year with Brazil and Hong Kong rounding out the top three. The major gainers this year so far are the bourses that were the major losers last year. How long this pattern continues is certainly an unknown as a lot of the strength in the three aforementioned bourses is a combination of short covering and light risk on buying. For now the global equity markets continue to act as a supportive catalyst for higher oil prices as well as for the broader commodity complex.
On the geopolitical front the market remain concerned that the evolving situation between Iran, the West and other Mid-East oil producers is going to result in some sort of supply disruption in the future. The market is certainly pricing in a loss of supply risk premium at the moment. The EU is moving closer to enacting an embargo of Iranian crude oil purchases by EU member countries. The meeting is to be held on Jan. 23. Again you know my view that I believe there will is a very low probability of any supply disruption associated with Iran and I do not think Iran will even attempt to block the Straits of Hormuz...let alone achieve that objective for any length of time.
The International Energy Agency (IEA) just released their monthly Oil Market Report. Following are the highlights from the report.
Oil markets began the New Year confronting a host of supply issues, not least a pending EU ban on Iranian oil imports and retaliatory threats from Tehran to close the Strait of Hormuz, through which flows roughly one-third of world’s oil exports. Oil prices jumped $4-$5/bbl on the reports, but eased on mounting Eurozone debt issues. Brent was last trading near $112/bbl and WTI at $100.50/bbl.
Clear signs of economic weakness tipped global oil demand into a declining year-on-year trend at the end of 2011, down 0.3 mb/d in 4Q11, its first such drop since the tail-end of the credit crunch. The significantly lower starting point has accordingly trimmed global oil demand growth to 1.1 mb/d for 2012 (from 1.3 mb/d previously).
Non-OPEC supply fell by 140 kb/d to 53.2mb/d in December, as rising North Sea output only partially offset a seasonal decline in biofuels and lacklustre supply from the FSU. Middle East unrest and other unplanned outages limited annual growth in 2011 to only 45 kb/d. A rebound to 340 kb/d growth is expected for 1Q12, and 1.0 mb/d for 2012 overall, as non-OPEC output averages 53.7 mb/d.
December OPEC crude output rose by 240 kb/d to 30.89 mb/d, the highest in more than three years, on a rapid recovery in supplies from Libya, and lesser increases from Saudi Arabia and the UAE. OPEC in December raised its output target to 30 mb/d for 2012, close to OMR projections for the ‘call on OPEC crude and stock change’.
OECD industry oil inventories rose by 4.1 mb to 2 647 mb, or 57.5 days of forward cover, in November, led by North American and European gasoline. Stock levels nonetheless remained below the five-year average for a fifth consecutive month. December preliminary data show a seasonal 23.6 mb draw in OECD industry stocks.
Global refinery crude runs are revised down by 250 kb/d and 170 kb/d for 4Q11 and 1Q12, to 74.8 mb/d and 74.9 mb/d, respectively. Weak economic growth and mild weather led to global demand contraction in 4Q11. A weakening economic outlook and recent refinery shutdowns in Europe curb early-2012 activity levels.
This week's oil inventory reports will be delayed by one day due to the closing of US government offices for a holiday yesterday. The API data will be released on Wednesday afternoon while the EIA data will hit the media airwaves at 11 AM EST on Thursday. At the moment oil prices are still being mostly driven by the tensions building in the Middle East between Iran and the West (as discussed above) coupled with the direction of the euro and the US dollar. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data 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 new snippets out of the Middle East and the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil. 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 across the board builds in inventory this week with a modest build in crude oil stocks along with a decrease in refinery utilization rates. I am expecting a strong build in gasoline inventories and an unseasonable build in distillate fuel stocks as winter like weather did not arrive during the report period in most parts of the US...especially the large HO market along the north east. 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 surplus of crude oil will come in around 0.9 million barrels while the overhang versus the five year average for the same week will widen around 16.3 million barrels.
With refinery runs expected to decrease by 0.3% I am still expecting a build in gasoline stocks. Gasoline stocks are expected to increase by about 2.0 million barrels which would result in the gasoline year over year deficit coming in around 1.9 million barrels while the surplus versus the five year average for the same week will come in around 6.5 million barrels.
Distillate fuel is projected to increase by 1.5 million barrels on a combination an increase in production and lower than normal heating oil consumption. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year the deficit will likely now be about 16.7 million barrels below last year while the surplus versus the five year average will come in around 0.6 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 for the same week was directionally in sync with the projections for this week. As such if the actual data in line with the projections there will not be a major on the year over year comparisons.
The WTI market remains above support and has moved back in the direction of making a move toward the upper end of the trading range. As such I am keeping my view back to cautiously bullish. I am currently expecting intermediate support around the $98 to $98.25/bbl area and resistance around the $103/bbl level.
I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster a sustained upside rally absent some very cold weather for an extended period of time. If the winter weather does not arrive over the next few weeks I would not be the least bit surprised to see the spot Nat Gas futures contract continue trading with a $2 handle.
Currently as a new day of trading gets underway in the US markets are higher.
Dominick A Chirichella
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