Quote of the Day
Can words describe the fragrance of the very breath of Spring?
Neltje Blanchan
The market finally paid a bit of attention to the simple fact that at the moment (as I have been writing in the newsletter) there is no shortage of oil in the world today. The Saudi Arabian Cabinet said that it will be working with other producers to "restore oil prices to levels that are fair for producers, consumers and the oil industry. The Saudi Oil Minister went on to say on Monday that there is no shortage of supply in the market...according to a report by Reuters. He said that Saudi Arabia has ample surplus crude oil capacity to raise production another 2.5 million barrels per day if it is needed.
As I have been pointing out for some time oil stocks are growing and supply from Saudi Arabia and elsewhere are more than offsetting the loss of supply from Yemen, Sudan, Syria and even Iran. Saudi Arabia has been producing at a rate of close to 10 million barrels per day since late February to early March. In addition today the US announced that it has decided to grant exemptions to Japan and 10 EU countries allowing them to import some quantity of Iranian oil. The US said they are planning on penalizing countries unless they show that they have made a significant reduction in their Iranian oil purchases in the middle of the year. In essence the US has watered down the sanctions for now. This will change the market sentiment from one that has been pricing in an almost immediate potential supply disruption from Iran to one that it will be a wait and see mentality. In addition the Kuwaitis said that the Iranian have vowed to not attempt to close the Straits of Hormuz.
With all of these announcements hitting the media airwaves on the same day it is obvious this was an orchestrated plan that likely started to be put in place last week when Obama met with Cameroon (again in my opinion). For the moment the edge is off a tad and with the prospects for negotiations to begin at some point the likelihood of any military action in the near term is declining. For now the risk premium embedded in the price of oil...which widened significantly since the Jan. 23 announcement by the EU to embargo Iranian crude oil purchases has started to recede and will likely continue to recede barring a notching up in the war of words between both sides. What this change of strategy by the US and the West means (in my opinion) is there is a greater concern over the short term impact of high gasoline prices (during an election year) and the potential impact on the economy rather than the short term need to reign in Iran's nuclear ambitions. The US blinked and now we will have to see if Iran gives some ground. Also it will be very interesting to see how this all plays out with the Israelis. They are the wildcard.
Not only did oil prices decline on the day, most all risk asset markets were lower in what was clearly a risk-off trading session. Global equity markets fell for the second day in a row as shown in the EMI Global Equity Index table below. The Index is down by 0.9% on the week so far narrowing the year to date gains to 14.3%. The market sell-off was initiated by a growing concern that the Chinese economy is slowing. Comments by BHP that iron ore use by China was going to be flat at best this year sent a strong signal to the markets that industrial production may be declining and as such the Chinese economic machine. None of this is new news as two weeks ago the Premier of China announced that they were lowering their GDP target for 2012 from 8% to 7.5%. For the moment the global equity markets are a bearish price driver for oil and most all of the traditional commodity markets. It should also be noted that the more than 2% decline in oil prices today can be attributed to the comments discussed above as well as the growing concerns over China because it is the main oil demand growth engine in the world.
The API report showed a surprise decline in crude oil stocks but a smaller than expected draw in gasoline inventories along with a surprise build in distillate fuel stocks. The API reported a modest draw (of about 1.3 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports decreased even as refinery run rates declined by 0.4%. The API reported a modest draw in gasoline stocks and a surprise build in distillate stocks versus an expectation for a more seasonal draw in inventories of both refined products.
The report is neutral with a bias to the bullish side. That said the changes since the report was issued may not be from the API inventory report as prices are higher across the board and are being driven by the movement of the macro indicators and a bit of a rebound from yesterday's strong sell-off. The market remains tied to the evolving situation in the Middle East that has been unfolding along with what is going on in China and Europe. The API reported a draw of about 1.3 million barrels of crude oil with a draw of 0.2 million barrels in Cushing and a build of about 0.4 million barrels in PADD 2, which is neutral for the Brent/WTI spread. On the week gasoline stocks declined by about 1.4 million barrels while distillate fuel stocks increased by about 0.6 million barrels.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed inventory report this week with a modest build in crude oil and a decline in both gasoline and distillate fuel stocks along with a modest decrease in refinery utilization rates. I am expecting a draw in gasoline inventories as well as a modest decline in distillate fuel stocks even as winter like weather was absent for most of the US during the report period...in particular the east coast. 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 deficit of crude oil will come in around 3.3 million barrels while the overhang versus the five year average for the same week will widen to around 9.1 million barrels.
With refinery runs expected to decrease by 0.3% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 2.0 million barrels which would result in the gasoline year over year surplus coming in around 6.4 million barrels while the deficit versus the five year average for the same week will come in around 8.6 million barrels.
Distillate fuel is projected to decrease by 1.0 million barrels on a combination of steady exports but warmer than normal weather last week. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 18.8 million barrels below last year while the deficit 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 the inventory changes are modestly different as there was a much larger decline in gasoline stocks versus the projections for this report. As such if the actual data is in line with the projections there will be modest changes in the year over year comparisons for most everything in the complex except for crude oil inventories.
Even though WTI is still trading above its technical support level of around $104/bbl the market may be entering into a medium-term downside correction as the immediate tensions with Iran seem to be easing a tad. As such I am downgrading my view to neutral for the moment while I sit back and see how the market digests all of Monday's news related to the geopolitical situation in Iran. Even as the market seems to be in the midst of a sentiment adjustment, oil continues to be driven by the evolving geopolitics of the Mideast...in particular Iran with just about all of the other normal prices drivers taking a secondary role...including fundamentals.
I am still keeping my view at neutral and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off with only weeks until the start of spring. As such for the short- to medium-term, I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.
Currently markets are lower as shown in the table below.
Best regards,
Dominick A. Chirichella
