Quote of the Day
A wise man will make more opportunities than he finds.
Hurricane Isaac has now made landfall in the southern Gulf with the eye of the storm very near New Orleans. The storm has not intensified beyond a Cat 1 storm... which is good news but the size of this storm as well as the slow movement of the storm is likely to dump a significant amount of rain and likely cause flooding in low lying areas. There already have been widespread power outages for thousands of customers. With a lot of the storm still offshore, this will be the story in the region all day today and it will be a day or so before an assessment can be made as to the condition of the oil and Nat Gas infrastructure.
As of yesterday the BSEE reported 1.287 million bpd or 93.28% of GOM crude oil production shut in and 3,000 mmcf/d or 66.7% of GOM Nat Gas production also shut in. Over a million bpd of refinery capacity has been shut along with LOOP shut down since Monday. As I have been discussing all week the market has only priced in preemptive cuts and has assumed there will be no infrastructure damage and thus no longer lasting supply interruptions of either Nat Gas or oil. As the storm passes through the area over the next several days the industry will be able to quickly assess the condition of the oil and Nat Gas facilities. As of now there are no reports of any unexpected events that would indicate any major oil and Nat Gas issues.
The other factor keeping a lid on oil prices is the threat of a release of oil from the SPR as well as G7 leaders yesterday calling on oil producers with spare capacity to increase production. In addition they indicated that they would call on the IEA if needed. So as of the moment oil prices are likely to remain subdued for the next several days at least. In addition to the above last night's API inventory report (see below for a more detailed discussion) was mostly bearish with a larger than expected build in both crude oil and distillate fuel with the draw in gasoline coming in above the expectations.
The evolving global economic situation is not too far into the background as another pass at 2nd quarter US GDP data is due out today with the market consensus looking for a revised 1.7%. In addition on Friday morning US Fed Chairman Bernanke will be speaking at the Jackson Hole Symposium with many in the market expecting some sign that the Fed is heading toward a new round of quantitative easing. I still believe that those in the market with that view will be disappointed as Bernanke is more likely to continue to reiterate the party line of the Fed that they will take additional action if needed.
Global equity markets were mostly unchanged over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is still down by about 0.2% on the week with the year to date gain hovering around 4.8%. Not much has changed with Germany still holding onto the top spot by a mile with China the only bourse in negative territory for the year. Global equities are mostly a neutral for oil and the broader commodity complex in the short-term as market participants await some key economic data as well as the outcome of Bernanke's speech.
The API report showed a surprisingly large build in crude oil stocks and distillate fuel stocks and a draw in gasoline. The API reported a build (of about 5.5 million barrels) in crude oil stocks versus an expectation for a modest draw as crude oil imports increased significantly while refinery run rates also decreased modestly by 1.2%. The API reported a seasonal build in distillate stocks. They also reported a larger than expected draw in gasoline stocks versus an expectation for a smaller draw in gasoline inventories.
The report is mixed but mostly bearish. The market is lower across the board in overnight trading and 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 build of about 5.5 million barrels of crude oil with a draw of 0.377 million barrels in Cushing, Ok and a draw of 0.399 million barrel draw in PADD 2 which is bearish for the Brent/WTI spread. On the week gasoline stocks decreased by about 2.4 million barrels while distillate fuel stocks increased by about 1.4 million barrels.
I do not expect this week's inventory report to be impacted from the preemptive shut-ins related to Isaac as the report period ended on Friday when the cuts were just getting underway. Next's week inventory report will be impacted and reflective of the lost production of both crude oil and refined products. 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 as the market is primarily focused on short term oil fundamentals because of the topical storm in the Gulf of Mexico.
My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to throttle back runs this week...most likely still a result of the unscheduled shutdowns (not related to Isaac) over the last couple of weeks or so. I am expecting a modest draw in crude oil inventories a draw in gasoline and a small seasonal build in distillate fuel stocks as the summer driving season is just about over. I am expecting crude oil stocks to decrease 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 1.9 million barrels while the overhang versus the five year average for the same week will come in around 18.6 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 $16.50/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 0.3% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1 million barrels which would result in the gasoline year over year deficit coming in around 6.9 million barrels while the deficit versus the five year average for the same week will come in around 3.7 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 30.4 million barrels below last year while the deficit versus the five year average will come in around 25.7 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...mostly on the crude oil side.
I still think the oil price is overvalued and 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. The first part of this week will be all about the impact of Isaac.
I am keeping my view at neutral with a bias to the bullish side until more clarity emerges from Isaac. The warm weather is also 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 mostly lower as shown in the following table.
Dominick A. Chirichella