Quote of the Day
Happiness is not a state to arrive at, but a manner of traveling.
Margaret Lee Runbeck
The oil complex and most risk asset markets are all struggling to recover from the sudden drop that hit all of the markets this week after the elections in Europe. The low of the week is still the level made during the first hour of trading on Sunday night with many markets still holding that short term support level. That said, gold has not and is now trading well below the low and below the $1,600 per ounce level. Commodities and equities have been a strong downside move for the last several weeks with most multi-commodity indices now at levels not seen since the end of last year. In other words most commodity gains for 2012 have been completely wiped out. This is certainly not a good outcome for the producing or natural resource countries but it is certainly a big positive for the consuming world in that the savings on the cost of purchase of commodities should work its way to the consumer who should now have more income available for discretionary and non-discretionary purchases. It is also a big positive in reducing the risk of price inflation.
On the equity front global markets have also been under pressure and are well below the highs hit in early March. The EMI Global Equity Index is now down 1.8% for the week as shown in the following table. The year to date gain has narrowed to 5.8% or the level it was at in the middle of January of this year. The Index has given back about 10% of its gains when compared to the high of the year hit in March. Three of the ten bourses in the Index are now in negative territory for the year...Canada, London and Paris with only Hong Kong still showing a double digit gain for the year. Canada is weak on a combination of a slowing economic outlook for the country as well as the strong move to the downside for most commodities as Canada is a natural resource dependent country. London and Paris are lower based on the lack of confidence in the EU's ability to solve the current confusion that has emerged since Sunday's election as well as the simple fact that the EU looks like it is on the cusp of moving back into a recession.
All of the markets are in the midst of a risk-off trading pattern as once again traders and investors head to the sidelines as all signs point to slow global economic growth at best. From the oil complex perspective a slowing economy will result in slowing in oil demand growth and likely underperform the forecasts...including the latest one by the EIA shown below. With the geopolitical risk in the Middle East also fading the likelihood of lower oil prices is increasing. From a technical perspective WTI has made two attempts at breaching the low from Sunday night and has failed both times. As of this morning with most risk asset markets under siege it is highly likely that WTI will make another pass at the low (around $95.35/bbl) and if breached the next level of support is not until the $92/bbl level.
Brent has been moving more slowly to the downside this week on a combination of force majeure issues in Nigeria (Shell on Bonny Light field) and the fact that both PADD 2 and Cushing crude oil stocks have been surging of late (see API inventory discussion below). I think we are coming to another peak in the Brent/WTI spread as the Seaway pipeline gets closed to start-up. But for not the spread is biased to the Brent side in the very short term.
The EIA released their latest Short Term Energy Outlook report yesterday afternoon. The main highlights related to the oil sector follow.
EIA expects U.S. total crude oil production to average 6.2 million barrels per day (bbl/d) in 2012, an increase of 0.5 million bbl/d from last year, and the highest level of production since 1998. Forecast lower-48 onshore crude oil production in 2012 averages over 4.3 million bbl/d, reaching its highest level since 1993. Projected U.S domestic crude oil production increases to 6.4 million bbl/d in 2013, driven primarily by growth in lower-48 onshore production.
EIA expects that global oil markets will continue to remain tight in 2012, although markets have eased somewhat since mid-March. Year-over-year supply growth in 2012 should significantly exceed the projected 1.0 million bbl/d rise in consumption, and we expect global commercial stocks to build following the significant draws during 2011. The oil production gains contributed to a counter-seasonal stock build during the 1st quarter of 2012 and a moderate reduction in backwardation in crude oil prices. However, EIA does not expect these large counter-seasonal stock builds to continue throughout the year, and both global oil inventory and spare production capacity levels are projected to be tight enough to support higher average crude oil prices in 2012 than in the previous year. The projected oil market balance reflects the impacts from previous sanctions against Iran, but the potential impacts of the more recent sanctions set to take effect this year are not accounted for in the current Outlook.
Crude oil prices have declined after increasing through mid-March, as global liquids supply outpaced consumption by 0.6 million bbl/d in first quarter 2012, which led to global inventory builds. The easing in the backwardation of waterborne light crude prices noted in EIA’s April 27th report has also continued in recent days. While price trends and reduced backwardation signal some market easing, the continuing premium on contracts for near-term delivery and a price level that remains elevated relative to the fourth quarter of 2011 is still indicative of tightness in world oil markets.
There are several uncertainties that could push oil prices higher or lower than projected. A number of countries outside of the Organization of the Petroleum Exporting Countries (OPEC) are currently undergoing supply disruptions, as discussed in EIA’s April 27th report and the April 18 edition of This Week in Petroleum. Oil prices could be higher than projected in this Outlook if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. Additionally, although the effects of the impending European Union embargo and other sanctions targeting exports of Iranian crude oil and their associated payments are still uncertain, heightened market anxiety surrounding a potentially significant supply disruption could bolster oil prices. On the demand side, economic growth below current expectations could result in reduced oil demand and lower prices.
World liquid fuels consumption grew by an estimated 0.8 million bbl/d in 2011. EIA expects consumption growth of 1.0 million bbl/d in 2012 and 1.2 million bbl/d in 2013, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth (World Liquid Fuels Consumption Chart). OECD liquid fuels consumption is projected to decline by 0.4 million bbl/d in 2012, with Europe and, to a lesser extent, the United States accounting for almost all of the decline. In 2013, forecast OECD liquid fuels consumption is expected to remain essentially flat.
EIA expects non-OPEC crude oil and liquid fuels production to rise by 0.7 million bbl/d in 2012 and by a further 1.1 million bbl/d in 2013. The largest area of non-OPEC growth will be North America, where production increases by 680 thousand bbl/d and 260 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and Canadian oil sands. In Brazil, output is projected to rise annually by an average of 130 thousand bbl/d over the next two years, with increased output from its offshore, pre-salt oil fields. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field next year, will increase its total production by 160 thousand bbl/d in 2013. Production also rises in China and Colombia over the next two years, while production declines in Mexico and the North Sea.
EIA expects that OPEC members will continue to produce slightly over 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil demand and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 1.0 million bbl/d in 2012 and then falls by 0.3 million bbl/d in 2013 as non-OPEC supply growth increases and stocks remain flat. OPEC non-crude petroleum liquids (condensates, natural gas liquids, coal-to-liquids, and gas-to-liquids), which are not covered by OPEC’s production quotas, are forecast to increase by 0.2 million bbl/d in 2012, and by 0.1 million bbl/d in 2013.
EIA expects Iran’s crude production to fall by about 500 thousand bbl/d by the end of 2012 and by an additional 200 thousand bbl/d in 2013, from its previous output level of 3.55 million bbl/d at the end of 2011. Iran’s output decline began to accelerate during the last quarter of 2011 and has continued. EIA believes that this acceleration reflects a lack of investment, which is needed to offset natural production declines. A number of foreign companies that were investing in Iran’s upstream have halted their activities as a result of previous sanctions against Iran that have made it difficult to do business with the country. EIA expects that the forecast decline in Iran’s output will be offset by increased production in other OPEC member countries.
EIA estimates that OECD commercial oil inventories ended 2011 at 2.59 billion barrels, equivalent to 56.1 days of forward-cover (Days of Supply of OECD Commercial Stocks Chart). Projected OECD oil inventories increase to 2.64 billion barrels and 57.3 days of forward-cover by the end of 2012. Although the forecast December 2012 inventory is slightly lower than the 2.66-billion-barrel level at the end of December 2010, the days of forward-cover are still among the highest end-of-year levels since 1991 because of the decline in OECD consumption.
The API report showed a huge build in crude oil that was well above the expectations but a much larger than expected decline in gasoline stocks and a surprise draw (and a large one) in distillate fuel inventories. The API reported a large build (of about 7.8 million barrels) in crude oil stocks and above the expectations as crude oil imports decreased modestly and refinery run rates also increased by 1.1%. The API reported a large draw in gasoline stocks and a large draw in distillate stocks versus an expectation for a more seasonal build in gasoline and a small build in distillate fuel inventories.
The report is bullish for refined products and bearish for crude oil. The market has not reacted strongly in overnight trading but has been drifting lower for all commodities in the complex. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. The API reported a build of about 7.8 million barrels of crude oil with a build of 2.3 million barrels in PADD 2 and a build of 1.2 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread. On the week gasoline stocks decreased by about 5 million barrels while distillate fuel stocks decreased by about 2.7 million barrels.
At the moment oil prices are still being mostly driven by the direction of the euro and the US dollar as well as by a view that the global economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West have been easing as another meeting is scheduled for May. As such we may see more market participants starting to pay attention to this week's round of oil inventory data suggesting that this week's oil inventory reports could also start to impact price direction. This week's oil inventory report could move to being a primary price driver especially 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 an across the board build in inventories this week with a modest build in crude oil, a small build in gasoline inventories and a modest build in distillate fuel stocks along with a small increase in refinery utilization rates. I am expecting a build in gasoline inventories and a build in distillate fuel stocks as the summer planting season winding down (decreasing the demand for diesel fuel) while the heating oil demand is dissipating. I am expecting crude oil stocks to increase by about 1.8 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 7.3 million barrels while the overhang versus the five year average for the same week will widen to around 22.7 million barrels.
With refinery runs expected to increase by 0.3% I am expecting a small build in gasoline stocks. Gasoline stocks are expected to increase by about 0.2 million barrels which would result in the gasoline year over year surplus coming in around 4.1 million barrels while the deficit versus the five year average for the same week will come in around 24.8 million barrels.
Distillate fuel is projected to increase by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.8 million barrels below last year while the deficit versus the five year average will come in around 9.3 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 inventories were mixed. As such if the actual data is in line with the projections there will be a modest change in the year over year comparisons for most of the complex.
I am keeping my view to cautiously bearish after oil broke down on all fronts last week with a continuation to the downside to open trading for the week. Oil is now solidly below the trading range it has been in for the last month or so and well below several key support areas. WTI is now solidly trading in double digits with Brent currently holding up a tad better.
I am keeping my view at neutral and keeping my bias also at neutral with an eye toward the upside. The surplus is still building in inventory versus both last year and the five year average and could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
Currently markets are lower as shown in the following table.
Dominick A. Chirichella