Quote of the Day
Even if you are on the right track, you'll get run over if you just sit there.
Will Rogers
The bloom came off the rose on Tuesday as equities were unable to hold on to earlier gains and ended the U.S. session in negative territory. Oil also followed equities closing well below the highs made in early morning trading. Today was more of a day driven by a lack of any new supporting data rather than a trading session driven by a plethora of new bearish data. In other words today was more driven by light profit taking selling after several weeks of mostly up days. The markets are clearly in a perception trading mode with the possibility of a new ECB bond buying program as the main impetus that has been driving oil and most risk asset markets for the last month or so. If the EU is able to turn around the sovereign debt issues this economy may start to move out of its malaise and recession and start to expand. If so oil demand in Europe could turn around and also start to expand.
At the moment there is an ample supply of crude oil in the world but refined product inventories in the United States have been running below both last year and the five-year average for most of this year. In fact distillate fuel stocks are significantly below last year and the five-year average as exports of diesel fuel have continued to grow with distillate exports over a million barrels per day. Tonight's API inventory report showed another surprise draw in distillate fuel stocks (see below for more details).
As mentioned above the equities markets did not carry through to the upside during U.S. trading hours as shown in the EMI Global Equity Index table below. The EMI Index gave back all of Monday's gains and is now unchanged for the week. The EMI Index year to date gain is back to 6% with one bourse, China, still in negative territory. Germany, the leader of the Index, topped the 20% gain level of 2012 today with only the Paris CAC 40 showing double digit gains for the year. Equities have been a positive driver for oil prices for the last month or so but on Monday U.S. equities pushed oil prices well off of its highs.
Overall I would not take too much from Monday's trading action as it was simply a profit taking day after several days in a row of gains. Although oil prices are overvalued basis current fundamentals they are well supported by the evolving geopolitical situation in the Middle East as well as the prospects for an EU solution and possible easing from both the U.S. and Europe. For the moment I think we are in a buy the dip mode rather than the beginning of a sustained downtrend.
The tropics are continuing to be in active mode as there are still three tropical storms working at the moment with one evolving in the Gulf of Mexico, one off of the coast of West Africa and one that has just been upgraded to a Tropical Depression...TD9... that is heading for the Caribbean. TD9 is now projected to strengthen to hurricane status by the second half of this week and based on the current projected path by the National Hurricane Center should be over Cuba by the weekend. If it continues on this path it could wind up in the Gulf of Mexico sometime next week. The weather pattern that is already in the Gulf has a 20% chance of strengthening to a tropical cyclone over the next 48 hours while the pattern off of Africa now has a 60% chance of strengthening. As it looks at the moment none of these storms are an immediate threat to the oil and Natural Gas rich area of the U.S. Gulf of Mexico but that could change quickly. However, as I said last week the tropics now must be on everyone's radar and monitored on a daily basis as the activity level is picking up.
The API report showed another surprisingly large draw in crude oil stocks but with a build in gasoline and a draw in distillate fuel stocks. The API reported a draw (of about 6 million barrels) in crude oil stocks vs. an expectation for a modest build as crude oil imports decreased significantly while refinery run rates also decreased modestly by 0.5%. The API reported a strong draw in distillate stocks. They also reported a modest build in gasoline stocks within the expectation for a modest build in gasoline inventories.
The report is mixed. The market has not reacted much in after hours trading with prices within Monday's closing range ahead of the EIA oil inventory report at 10:30 AM on Tuesday. 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 6 million barrels of crude oil with a minor draw of 0.005 million barrels in Cushing, Ok and a draw of 1.9 million barrel draw in PADD 2 which is bearish for the Brent/WTI spread. On the week gasoline stocks increased by about 0.9 million barrels while distillate fuel stocks decreased by about 1.0 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 and one or two of the major central banks will come to the rescue. The tensions evolving in the Middle East between Iran and the West seem to be moving more into the foreground as the rhetoric between Israel and Iran has ratcheted up several levels over the last few weeks. However, with the low level of trading activity and light economic calendar we could see a more pronounced reaction from market participants to this week's round of oil inventory data even thought the macro risk of the markets is still the main concern of all market players. This week's oil inventory report could likely be a primary price catalyst especially if the actual outcome is significantly different from the market projections.
My projections for this week’s inventory report are summarized in the following table. I am expecting the U.S. refining sector to throttle back runs this week, most likely driven by the unannounced refinery shutdowns over the last week or so. I am expecting a modest build in crude oil inventories a draw in gasoline and a seasonal build in distillate fuel stocks as the summer driving season is starting to wind down. I am expecting crude oil stocks to increase by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 15.4 million barrels while the overhang vs. the five-year average for the same week will come in around 27.8 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading around the $17.50/bbl premium to Brent level. I am still of the view that the spread will continue the process of normalization over the next 6 months.
With refinery runs expected to decrease by 0.5% I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year deficit coming in around 8.2 million barrels while the deficit versus the five-year average for the same week will come in around 4.4 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 31 million barrels below last year while the deficit versus the five year average will come in around 26.3 million barrels. Exports of distillate fuel have been the main storyline this year with exports running around 1 million bpd.
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's inventories are mostly in the same direction as the projections. As such if the actual data is in line with the projections there will only be a modest change in the year over year comparisons for most of the complex.
I still think the oil price is overvalued and getting toppy at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $105 to $115 trading range. There are a lot of dynamics that will impact oil prices in the short term and the ranking of the price drivers are fluid and very susceptible to changing. The only constant for oil prices in the short term is above normal levels of volatility. Geopolitics are currently moving back into the foreground and starting to play a role in price setting once again as well as the perception of more stimulus.
I am moving my view back to neutral as the warm weather may be returning and could support prices in the short term. If so the upcoming injections could continue to underperform history and thus result in the overhang of Nat Gas in inventory continuing to narrow as it has been for the vast majority of the injection season to date.
Markets are mixed heading into Asian trading hours as shown in the following table.
Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
