Quote of the Day
Make use of time, let not advantage slip.
William Shakespeare
Not that much of anything changed today but the selling in most risk asset markets seems to have subsided with some pockets of gains in commodities and equities as oil traded in positive territory for most of the trading session. G7 had their conference call today with nothing out of the group other than to say that they are watching how things are progressing in Europe in particular. As I have discussed on numerous occasions all of these markets are still very oversold and many participants are looking for any catalyst that could result in a long awaited short covering rally.
As I detailed in yesterday's newsletter the month of June is the month of events with lots of opportunity for any of these events to send the market moving strongly in either direction. The two main events the markets are looking at very closely is what evolves in Europe with Greece's June 17 election as well as what new plan (if any) comes out of the EU to handle the evolving sovereign debt issues around the region with most eyes focused on Spain. The second main issue is whether or not the US Federal Reserve will embark on a new version of quantitative easing...QE3 at their end of June FOMC meeting. Chairman Bernanke is testifying before Congress on Thursday and the market will be parsing his every word to see if he signals his intention before the meeting.
These are major market moving events with the markets starting to slowly price in the outcome...especially the possibility of a QE3 out of the US basis the way gold has been trading since the horrible jobs number last Friday and the fact that the selling has lost some of its momentum in the oil and equity markets. I also think that the EU in conjunction with the IMF and ECB will come up with something to kick the can down the road as I also believe the Greeks will elect the party that is pro bailout. I think this is the view that is slowly permeating around the markets and any deviation from this view will result in quick and sudden selling of most all risk assets. None of this is a sure thing in either direction with uncertainty going forward about the only certainty for the markets.
The API report showed a modest draw in crude oil versus an expectation for a draw and a build in gasoline stocks along with a build in distillate fuel inventories. The API reported a draw (of about 1.8 million barrels) in crude oil stocks and within the expectation range as crude oil imports decreased while refinery run rates increased by 1.5%. The API reported a modest build in gasoline stocks. They also reported a modest build in distillate stocks versus an expectation for a more seasonal build in distillate fuel inventories.
The report is bearish for gasoline, neutral for crude oil and bearish for distillates. The market has not reacted strongly in overnight trading but has been stabilizing for all commodities in the complex mostly due to short covering after yesterday's strong sell-off. 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 at 10:30 AM. The API reported a draw of about 1.8 million barrels of crude oil with a build of 2.9 million barrels in PADD 2 and a build of 0.929 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread. On the week gasoline stocks increased by about 1.4 million barrels while distillate fuel stocks increased by about 1.8 million barrels.
At the moment oil prices are still being mostly driven by the events discussed above along with 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 the industry to embark on an aggressive campaign of converting a portion of the surplus crude that has been building for the last several months into refined products... in particular gasoline and distillate fuels whose inventories have been in decline. I am expecting a draw in crude oil inventories and a build in both gasoline and 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 decrease by about 1.5 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 14.2 million barrels while the overhang versus the five year average for the same week will widen to around 34.1 million barrels.
I am also expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery are rates are starting to increase in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading below the $15/bbl premium to Brent level for the last few days. 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 0.8% I am expecting modest build in distillate stocks. Gasoline stocks are expected to increase by 1.2 million barrels which would result in the gasoline year over year deficit coming in around 13.1 million barrels while the deficit versus the five year average for the same week will come in around 8.1 million barrels.
Distillate fuel is projected to increase by 0.8 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 22.3 million barrels below last year while the deficit versus the five year average will come in around 17.4 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 in the same direction as the projections. 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 both WTI and Brent are trading at levels not seen since the fall of 2011. Oil is still solidly below the trading range it was in just a few weeks ago and well below several key support areas yet again. WTI is still solidly trading in double digits with Brent now below the $100/bbl mark. The trend remains downward but oversold and susceptible to a short covering rally at some point in time...possibly as early as this week.
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.
Nat Gas has been holding up well amidst all of the volatility in the global markets. Since correcting to the downside earlier last week the market is settling into the $2.25 to $2.50 trading range that I have been suggesting. Within this price range Nat Gas prices are much more in line with what the fundamentals are suggesting that the price of Nat Gas should be or in other worlds more in line with its current true value. At this current price level the economics of switching from coal to Nat Gas continues to be favorable for Nat Gas. Based on where Nymex is trading for the spot Appalachian coal and Nat Gas futures contracts Nat Gas is still holding an advantage of $0.392/mmbtu. As I have said in the past this is a macro comparison and does not account for any differences in efficiencies between these two fuels. With the economic advantage still favorable to Nat Gas the additional Nat Gas demand that has been derived from switching will continue to keep the weekly injections at below normal historical levels for the short to even medium term.
Currently markets are lower heading into the Tuesday night session as shown in the following table. London reopens tomorrow.
Best regards,
Dominick A. Chirichella
