Quote of the Day.
Make use of time, let not advantage slip.
William Shakespeare
The correction in the oil complex continued for another session with the spot Nymex WTI contract now down around $5/bbl since peaking a tad over $100/bbl on Friday. As I have been suggesting the market was toppy and susceptible to a downside correction...which is what has been underway for the last two trading sessions. The current round of profit taking selling has resulted from a combination of a buy the rumor sell the news on the QE3 front coupled with the fact that in spite of all of the geopolitical risk that exists there is still a very ample supply of oil in the world. The Saudi's are producing more than 10 million barrels per day of oil while demand is lackluster at best as even the main oil demand growth engine of the world... China is also slowing.
QE3 in the US, QE in the UK, the ECB bond buying program and investments in China are all forms of stimulus programs that at some point in time will result in pushing inflation higher, the US dollar lower and thus higher oil and commodity prices. What is going on in the market at the moment (in my opinion) is a consolidation phase as the weak longs head to sidelines while the medium-term investor/ traders wait for a buying window...which I do not think will be too long in the making. I do not expect the current downside move to be more than a correction and definitely not the beginning of a bear market trend. There are too many headwinds at the moment that are supportive of oil prices going forward.
On the other hand I do not expect oil prices to soar to new year-to-date highs anytime soon...barring an oil supply disruption in the middle east. Once the correction is over I would then expect the oil complex to enter into a slowly evolving uptrend that is likely to last as long as the geopolitical risk from Iran and elsewhere in the Middle East exists and the central bank printing presses continue to roll out money. Limiting the upside moves in oil will ultimately come down to what all of the stimulus programs do to the global economy... if anything. Unless the accommodative monetary policies in both the developed and developing world countries results in an economic growth spurt global oil demand is not going to grow at a faster rate than it has over the last year or so and as such supply should outstrip demand in the medium term.
Global equity markets fared better than oil today falling only about 0.2% over the last 24 hours as shown in the EMI Global equity Index table below. The Index is down by 0.5% so far this week narrowing the year to date gain to 9.3%. The global equity markets are still holding onto the majority of the gains since the announcement of the ECB bond buying program as well as QE3. Much like the oil complex the global equity markets are also in the midst of a round of profit taking selling that I also expect to be short lived and shallow. This week global equities are a neutral to slightly bearish price driver for oil and the broader commodity complex.
The API report was mostly in the range of expectations with the exception of distillate fuel. The crude oil build was as expected while the gasoline build was a bit below expectations while the distillate decline was a surprise. The API reported a build (of about 2.4 million barrels) in crude oil stocks versus an industry expectation for a modest build as crude oil imports increased strongly while refinery run rates also increased modestly by 3.5%. The API reported a surprise draw in distillate stocks. They also reported a smaller than expected build in gasoline stocks.
The report is mixed but more biased to the bearish side for everything other than distillate. The market is marginally higher heading into the Asian trading session and ahead of the EIA oil inventory report at 10:30 AM Wednesday. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out Wednesday at 10:30 AM. The API reported a build of about 2.4 million barrels of crude oil with Cushing, Ok declining about 0.7 million barrels while PADD 2 stocks also declined by 0.7 million barrel which is bearish for the Brent/WTI spread. On the week gasoline stocks increased by about 0.1 million barrels while distillate fuel stocks decreased by about 1.1 million barrels.
My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to still be working its way back to a full return to normal operations from the preemptive shutdowns ahead of Isaac. I am expecting a modest build in crude oil inventories, a build in gasoline and a seasonal build in distillate fuel stocks as Isaac shut-ins played only a minor role during the inventory report period. I am expecting crude oil stocks to increase by about 2.5 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 15.2 million barrels while the overhang versus the five year average for the same week will come in around 32.2 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 around the $16/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 increase by 3.5% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year deficit coming in around 12.1 million barrels while the deficit versus the five year average for the same week will come in around 5.0 million barrels.
Distillate fuel is projected to increase by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 28.4 million barrels below last year while the deficit versus the five year average will come in around 22.9 million barrels. Exports of distillate fuel are likely to have also restarted.
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 exactly in sync with this week's projections. As such if the actual data is in line with the projections there will be a significant change in the year over year comparisons for crude oil and to a lesser extent for gasoline.
I still think the oil price is overvalued 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 the outcome of the ECB meeting and the new round of QE along with the growing geopolitical risk in the Middle East. The bias is to downside this week based on the profit taking selling that started on Monday is likely to be short lived and shallow and viewed by the market as buying opportunities at some point.
I am keeping my view at neutral with a bias to the downside as the industry is back to normal operations after Isaac. At current prices the economics now favor coal over Nat Gas and there are no major weather pulls on demand.
Markets are mostly mixed heading into the Asian trading session as shown in the following table.
Dominick A. Chirichella
