Quote of the Day.
The best thing about the future is it comes one day at a time.
The oil complex is in a battle between the perception traders, who view each piece of bad economic news as a sign that more simulative measures are coming from all of the main central banks around the world, and the reality traders, who look at the fact that every major segment of the global economy is slowing and even with more stimulus global demand for oil and most other major commodities will continue to decline. Manufacturing PMI data in just about every major country in the world is now below the expansion threshold of 50 and is thus in the contraction mode. This is an energy sensitive indicator and is suggestive of a further slowing in energy consumption as the manufacturing sector... globally... continues to slow.
Had it not been for Hurricane Isaac oil prices would have most likely declined strongly over the last week or so as prices of both WTI and Brent are trading near the upper end of their trading range and at the moment the current fundamentals do not support prices at this level. The fact that a significant amount of oil production has been shut-in along with about 6% of refining capacity has resulted in inventories in the US moving into a deficit situation versus last year after showing a surplus of crude oil versus last year for most of this year. Thus it is a temporary support and one that is not likely to be long lasting as a significant amount of production has already been restarted and refineries are also in restart mode. There has been no reported major infrastructure damage form the storm as all of the shut-ins had been preemptive ahead of the storm.
On the storm front there are no new tropical storms that could impact the oil and Nat Gas region in the US Gulf at the moment. The energy industry is currently in restart mode with about 700,000 bpd or 51.5% of GOM crude oil production still shut in and 1,309 mmcf/d or 29% of GOM Nat Gas production still shut as of yesterday afternoon. This is an ongoing process and I am still expecting producing operations to return to normal within the next week. Refineries are restarting and logistics are also close to normal with LOOP back to normal operations as of September 1. The big impact from the storm will begin to show up in this week's inventory reports and to a lesser extent in next week's reports.
Global equities have continued to decline as shown in the EMI Global Equity Index table below. The Index is now down by 1.9% on the week with the year to date gain now just 2%. There are now three bourses in negative territory for the year China, Canada and Brazil with Germany still holding onto sizeable gains for the year. At the moment it appears that the reality traders are outlasting the perception traders as global equity markets have been on the defensive for over a week in spite of the talk of more easing from the US Fed and the prospects for a new bold solution by the ECB. Global Equity markets have been a negative price driver for oil and the broader commodity complex over the last week or so.
Thursday the markets will hear from ECB President Draghi about what his new bond buying program will look like. That said details of the plan could be sketchy after Thursday's meeting as the ECB awaits the Sept. 12 court ruling in Germany about the program. As such the market could be disappointed if Draghi simply restates what he said after the last meeting.
This week's oil inventory reports will be released one day late due to the US holiday on Monday The API inventory report will be released late Wednesday afternoon with the more widely followed EIA data hitting the media airwaves at 11 AM EST on Thursday. This week's 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 shows a large decline as projected due to Hurricane Isaac in the Gulf of Mexico. This will be a reminder report that even a hurricane that results in only preemptive shut downs will still have a significant impact on supply and thus inventory levels.
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... a result of the preemptive shutdowns ahead of Isaac. I am expecting a significant draw in crude oil inventories, a draw in gasoline and a large draw in distillate fuel stocks all related to Isaac. I am expecting crude oil stocks to decrease by about 11.5 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will now show a small deficit of 0.1 million barrels while the overhang versus the five year average for the same week will come in around 16.2 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 over the $19/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 6% I am expecting a large draw in gasoline stocks. Gasoline stocks are expected to decrease by 5.5 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 9.6 million barrels.
Distillate fuel is projected to decrease by 3 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 33.7 million barrels below last year while the deficit versus the five year average will come in around 29.1 million barrels. Exports of distillate fuel during the storm were likely held back.
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 not in the same direction as the projections. As such if the actual data is in line with the projections there will only be a significant change in the year over year comparisons for the entire complex...due to Isaac.
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 $110 to $120 trading range. That said this week prices will be impacted by the weekly inventory report as well as by the outcome of the ECB meeting and the growing view that more stimulus from both China and the US is on the way.
I am keeping my view at neutral with a bias to the bullish side until more clarity emerges from Isaac insofar as restarting Nat Gas operations. The warm weather is also returning and could support prices in the short term. The combination of the impact of Isaac and warm weather is likely to result in the upcoming injections continuing 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 as shown in the following table.
Dominick A. Chirichella