Quote of the Day.
Don't listen to their words, fix your attention on their deeds.
Albert Einstein
Today Germany's Federal Constitutional Court ruled in favor of Germany's participation in the European Stability Mechanism (ESM) with a cap of €190 billion. The ESM is a permanent €500 billion fund that offers loans to member states. The ESM may also buy bonds to lower member country borrowing costs. Germany will be the largest contributor to the fund with a 27% share. This ruling is certainly a key element for the ECB program announced last week by Mr. Draghi and now opens the door for the ECB to begin to act.
The next big event on the docket is tomorrow's Federal Open Market Committee (FOMC) meeting announcement. The market has been pricing in some additional easing by the Fed. In fact the market may be setting up for a downside correction irrespective of the outcome. If the Fed announces a new QE3 program the market could be in a buy the rumor sell the fact mode and thus result in a downside correction. On the other hand if the Fed pushes the decision down the road (my likely outcome) we could also see a downside correction in risk asset markets. Irrespective of the outcome the next several days are likely to be volatile with the potential for intraday price reversals.
The IEA just released their latest oil monthly market forecast. Following are the main highlights of this report.
Oil prices extended earlier gains in August, but crude prices seemed to plateau in the second half of the month. Brent was last trading at $115/bbl after reaching a high of near $117/bbl around mid-August, while WTI traded at $97, close to its August high. Increases in product prices outpaced and outlasted the crude rally, with gasoline, naphtha and middle distillate prices all posting steep gains.
Demand projections for 2012 and 2013 have been raised by 100 kb/d on data revisions for 2011, to 89.8 mb/d and 90.6 mb/d, respectively, though demand growth forecasts are little changed at around 0.8 mb/d for both years. Demand grew by 1.2 mb/d in 2Q12, buoyed by Japanese utility burn to replace idled nuclear generators..
Global oil supply fell by 0.1 mb/d m-o-m to 90.8 mb/d in August from upwardly revised July estimates. OPEC liquids production growth, led by Nigeria, Angola and Iraq, failed fully to offset unplanned outages in non-OPEC countries. Crude oil imports from Iran are estimated to have inched up in August to 1.1 mb/d, from below 1 mb/d in July. Non-OPEC annual supply growth slowed to just 0.2 mb/d in 3Q12.
Improved refining margins spurred steep gains in OECD refinery runs in July and August, lifting global crude throughput estimates for 3Q12 to 75.7 mb/d, up 1.3 mb/d on 2Q lows and 450 kb/d y-o-y. Non OECD gains are projected to keep runs flat through 4Q12, lifting annual growth to 1.3 mb/d.
OECD industry crude stocks contracted by 16.5 mb in July and a preliminary 23.7 mb last month on strong refining crude runs. Products built by 32.8 mb and 4.2 mb, respectively. Total industry oil builds of 10.6 mb for July were below normal and preliminary data hint at counter-seasonal draws in August.
In addition the EIA released their latest Short Term Energy Outlook (STEO) yesterday afternoon. Following are the main oil related highlights from this report.
- EIA expects U.S. total crude oil production to average 6.3 million barrels per day (bbl/d) in 2012, an increase of 0.7 million bbl/d from last year. Projected U.S. domestic crude oil production increases to 6.8 million bbl/d in 2013, the highest level of production since 1993
- World liquid fuels consumption grew by an estimated 1.0 million bbl/d in 2011. EIA expects consumption growth of 0.8 million bbl/d in 2012 and 1.0 million bb/d in 2013, with China, Russia, the Middle East, Brazil, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for most of the consumption growth. Although forecast liquid fuels consumption in the United States increases by 0.1 million bbl/d in 2013, total OECD liquid fuels consumption falls by 0.2 million bbd/d in 2013, led by declines in consumption in Europe and Japan.
- EIA expects non-OPEC liquid fuels production to rise by 0.5 million bbl/d in 2012 and by a further 1.2 million bbl/d in 2013. The largest area of non-OPEC growth is North America, where production increases by 1.0 million bbl/d and 0.6 million bbl/d in 2012 and 2013, respectively, due to continued production growth from U.S. onshore shale and other tight oil formations and from Canadian oil sands. EIA expects that Kazakhstan will commence commercial production in the Kashagan field next year, increasing its total production by 160 thousand bbl/d in 2013. In Brazil, EIA projects output to rise by 200 thousand bbl/d in 2013, with increased output from its offshore, pre-salt oil fields. Forecast production also rises in Columbia, Russia, and China over the next two years, while production declines in Mexico and the North Sea.
- EIA expects that OPEC member countries will continue to produce more than 30 million bbl/d of crude oil over the next two years. Projected OPEC crude oil production increases by about 1.0 million bbl/d in 2012 and 0.1 million bbl/day 2013. The growth in OPEC supply is due in part to Iraq, where new infrastructure has enabled the country to increase production to the highest level since 1989. Following a disruption in early July, Libya restored oil production and exports to about 1.5 million bbl/d in August. OPEC non-crude oil liquids (condensates, natural gas liquids, and gas-to-liquids), which are not covered by OPEC's production quotas, averaged 5.3 million bbl/d in 2011. EIA forecasts that non-crude oil liquids will increase by 0.3 million bbl/d in 2012 and by 0.2 million bbl/d in 2013.
- EIA's forecast of Iranian crude oil production is unchanged from last month's Outlook, with forecast production falling by about 1 million bbl/d by the end of 2012 relative to an estimated output level of 3.6 million bbl/d at the end of 2011, and by an additional 0.2 million bbl/d in 2013.
- EIA estimates that OECD commercial liquid fuel inventories ended 2011 at 2.60 billion barrels, equivalent to 56 days of forward cover. OECD stocks at the end of August 2012 are estimated to be about 22 million barrels higher than at the end of 2011, but are projected to fall back to 2.60 billion barrels by the end of 2012. OECD commercial inventories increase to 2.65 billion barrels and 57 days of forward cover by the end of 2013.
The recovery from the preemptive shut-ins ahead of hurricane Isaac continues and are almost complete. As of yesterday afternoon there is now just 57,439 bpd or 4.16% of GOM crude oil production shut in and just 213 mmcf/d or 4.73% of GOM Nat Gas production shut down. The industry will be at normal operating levels in the next day or so..
At the moment there is nothing in the near term coming from the tropics that is a threat to the energy operations in the Gulf of Mexico or US land for that matter. There is a tropical weather pattern located in the central Atlantic between the Cape Verde Islands and the Lesser Antilles that is showing signs of organization. At the moment this pattern has been upgraded to TD14 and is projected to move west then north into the North Atlantic. At the moment this pattern does not look like it will be anything that threatens the US.
The API report showed an unexpected build in crude oil stocks a larger than projected build in distillate fuel stocks but a much larger than expected decline in gasoline stocks. The API reported a build (of about 0.2 million barrels) in crude oil stocks versus an industry expectation for a modest draw as crude oil imports increased modestly while refinery run rates also decreased modestly by 2.8%. The API reported a large build in distillate stocks. They also reported a larger than expected draw in gasoline stocks.
The report is mixed but more biased to the bearish side for everything other than gasoline. The market is higher across the board in overnight trading and ahead of the EIA oil inventory report at 10:30 AM today but more due to the approval of the ESM in Germany (see above). 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 0.2 million barrels of crude oil with Cushing, Ok declining about 0.4 million barrels but a build of 0.765 million barrel in PADD 2 which is neutral for the Brent/WTI spread. On the week gasoline stocks decreased by about 4.2 million barrels while distillate fuel stocks increased by about 2.5 million barrels.
I am expecting the US refining sector to still be in recovery mode and not fully return to normal operations from the preemptive shutdowns ahead of Isaac. I am expecting a modest draw in crude oil inventories, a draw in gasoline and a small build in distillate fuel stocks all related to Isaac. I am expecting crude oil stocks to decrease by about 2 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will now show a surplus of 2 million barrels while the overhang versus the five year average for the same week will come in around 19.3 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 $18.5/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 2.5% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.5 million barrels which would result in the gasoline year over year deficit coming in around 11.4 million barrels while the deficit versus the five year average for the same week will come in around 6.5 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 29.2 million barrels below last year while the deficit versus the five year average will come in around 24.7 million barrels. Exports of distillate fuel during the storm were likely held back.
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, prices are almost solely being driven in the short term by a combination of last week's 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 as the industry is already almost back to normal operations after Isaac. At current prices the economics still favor Nat Gas but if prices do work their way to the upper end of the trading range utilities could begin to move back to coal.
Markets are mostly higher as shown in the following table.
