Quote of the Day
There is time for everything.
Thomas A. Edison
Just when all you thought you had to worry about was Greece, since mid-afternoon yesterday concerns over Spain have sent all risk asset markets lower and erased the small gains from Monday. Market participants are showing no confidence that the EU is going to resolve its major sovereign debt and banking issues anytime soon nor are they convinced that the global economy is going to move into a growth spurt in the near future. Greece and now Spain remain the number one short-term bearish price drivers for all markets as talk of contagion is starting to spread around the media airwaves. If market players are able to get over the growing EU issues they then have to face the fact that the global economy is slowing in all corners of the world with hardly a bright spot. Simply put the markets are in a risk-off pattern that is starting to last a lot longer than some participants had originally thought.
The euro is now trading at a two year low with the short-term and medium-term trend still pointing lower. The next major support area for the euro is around the 1.19 level hit back in May of 2010. As the euro falls, cash continues to flow into the US dollar with the ICE U.S. Dollar Index now trading at the highest level since August of 2010. The dollar remains the only place to hide at the moment as asset selling seems to be picking up momentum. A strong US dollar normally is bearish for commodities as well as most equity markets. The macro correlations are all in place and as the euro falls, US dollar rises while oil and the boarder commodity complex continues to tick lower.
As of this writing the spot WTI contract just breached the low made on May 23rd and if it remains below the $89.25/bbl level the next major technical support area is not until around $86/bbl or the price level the oil complex was trading at back in October of 2011. The spot Brent contract is on a path to test its next major technical support level of about $102/bbl. There is no geopolitical premium in the price of oil and prices are starting to reflect the likelihood of a slowing of oil demand growth as the global economy continues to slow further.
Global equity market are also under pressure as money is continuing to come out of most equity markets and moving into cash...especially the US dollar. The EMI Global Equity Index (table shown below) is now lower for the week resulting in the year to date loss widening to 1.1%. Since the US close yesterday all equity markets have moved into negative territory with US equity futures pointing to a strongly lower opening in a few hours. The market sentiment has changed significantly the last two months. In the middle of March the EMI Index was in a strong uptrend with the year to date gain at 15.2%. Since then the sentiment has turned decidedly negative and the Index has lost 16.3%. This is a very negative turnaround and one that clearly shows the market is expecting even further event issues as well as a no growth economic picture.
Aside from all of the macro issues sending oil prices lower, supply and demand are more than in balance with a bias toward the oversupplied side of the equation. Demand is waning in many places around the world but in particular in China the main oil demand growth engine of the world. With Saudi Arabia and OPEC in general producing at very high levels there has not been nor is there expected to be any shortfall of supply in the foreseeable future. The overall fundamentals for oil are biased to the bearish side.
This week's oil inventory reports will be released one day late. The API data will be released this 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 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 will take place in June. As such we may not see much of a reaction from market participants to this week's round of oil inventory data as the macro risk off momentum is currently the main concern of al market players. This week's oil inventory report will likely be a background price catalyst unless the actual outcome is significantly different from the market projections.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a build in crude oil and distillate fuel with a small decline in gasoline stocks. I am expecting a build in crude oil inventories and a build in distillate fuel stocks as the summer planting season is winding down (decreasing the demand for diesel fuel) while heating oil demand is over. I am expecting crude oil stocks to increase by about 0.7 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 9.4 million barrels while the overhang versus the five year average for the same week will widen to around 32.4 million barrels.
I am also expecting a modest build in crude oil stocks in Cushing, Ok as the Seaway pipeline did start pumping but it was not at capacity during the inventory report period. This would be bullish for the Brent/WTI spread in the short term which is still trading around the $15.50/bbl premium to Brent level for the last few days. That said I am still of the view that the spread will begin the process of normalization over the next 3 to 6 months.
With refinery runs expected to increase by 0.2% I am expecting a small build in distillate stocks. Gasoline stocks are expected to decrease by just 0.2 million barrels which would result in the gasoline year over year deficit coming in around 11.5 million barrels while the deficit versus the five year average for the same week will come in around 33.9 million barrels.
Distillate fuel is projected to increase by 0.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 20.4 million barrels below last year while the deficit versus the five year average will come in around 14.6 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 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 at cautiously bearish after oil broke down on all fronts once again as it has already tested the May 23rd low for WTI and dropped below the $105 level for Brent for the first time since December of 2011. but Oil is still solidly below the trading range it was in just a few weeks ago and well below several key support areas. WTI is still solidly trading in double digits with Brent slowly heading in that direction.
I am keeping my view at neutral and keeping my bias at neutral with an eye toward the upside now that Nat Gas has moved back to much more representative levels that are in sync with current fundamentals. The surplus is still narrowing in inventory versus both last year and the five year average but 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.
As the June Nymex contract moved to expiration yesterday the newly annointed spot July contract has been under pressure for the last several trading sessions. As I have been discussing for the last few weeks the current fundamentals do not support prices up in the $2.70 to $2.80/mmbtu level which is one of the reasons why we have seen a downside correction which began after last Thursday's EIA inventory report was released.
As I discussed in Friday's newsletter coal to gas switching has been a major reason why injections this year have underperformed versus both last year and the five year average for the same timeframe. With Nat Gas prices falling strongly over the last three trading sessions the economics are now more solidly back in favor of continuing to burn Nat Gas for power generation rather than coal. Basis today's number the advantage is back to about to $0.38/mmbtu versus almost break even in the second half of last week. So for now we should not see the industry moving away from Nat Gas based on economics. Other reasons could force some coal burning like coal inventory containment issues but definitely not based on economics basis current prices for the July Nat Gas and Appalachian coal prices.
Currently markets are lower as shown in the following table.
Dominick A. Chirichella