Quote of the Day.
Freedom lies in being bold.
The combination of slow growth in the global economy along with current fundamentals that are starting to show signs of supply outstripping demand have kept oil prices hovering near the lower end of the trading range for the last two weeks. The oil market just does not have enough momentum to push prices toward the upper end of the trading range in the short term nor does it have enough selling momentum to drop it much below the lower end of the trading range at the moment. The market has been in a consolidation pattern since losing about 10% of its value (basis WTI crude oil) as it builds technical support. From a technical perspective the complex may be in a short term bottoming pattern with its next move toward the upper end of the trading range as long as it holds support (WTI support around $90/bbl, Brent support $109.50/bbl).
The main question from a fundamental viewpoint is: Will the refined products market continue to provide support for the crude oil complex? Both RBOB gasoline and HO have been keeping the complex from breaching the aforementioned support areas for crude oil as inventories of both of these products have been in decline for weeks. That said with refinery runs starting to return to more normal levels in the US and even in Europe there should be a bump up in supply of both of these product categories which could then start to pressure prices throughout the oil complex. Today's EIA inventory report should shed some light on the situation in the US.
On the macroeconomic front the data continues to support the view of a slowing global economy. Overnight the latest snapshot of the Chinese services sector (PMI) came in at 53.7 in September compared to 56.3 in August. This is the lowest level since the first quarter of 2011. A clear sign that the economy in China is slowing as both the services and manufacturing sector have been slowing for months. If this pattern continues unabated (with no further stimulus measures from the government) oil demand growth is likely to slow further going forward. With all of the oil demand growth projected to come from the developing world economies and with China representing a major portion of the growth global oil balances will be biased toward the oversupplied side of the equation.
The data out of Europe this morning is not much better than that from China as the services sector in the EU is also slowing. Today the jobs data cycle starts in the US with the release of the ADP private sector survey along with the Challenger jobs cut report. In addition the ISM services sector Index will also be released along with the minutes from the last FOMC meeting this afternoon. As I have been discussing in the report I am not sure how much the oil market will react to today's EIA inventory report with all of the economic data points that have been released so far today and yet to be released during the US trading session.
Global equity markets have been drifting lower over the last twenty four hours as shown in the EMI Global Equity Index table below. The EMI Index shed about 0.23% narrowing the week to date gain to just 0.3% as well as narrowing the year to date gain to 7%. Not much has changed in the rankings of individual bourses as the equity markets have been in a relatively quiet trading pattern so far this week. The potential main market mover is not likely to come until the US nonfarm payroll data is released on Friday morning. For now global equities have been a neutral for the oil complex as well as the broader commodity complex.
The API report was mixed and marginally outside of the range of expectations. The crude oil build was lower than expected while both gasoline and distillate fuel showed small declines from inventory versus a projection for a small build. The API reported a build (of about 0.5 million barrels) in crude oil stocks versus an industry expectation for a larger build as crude oil imports decreased modestly while refinery run rates increased modestly by 1.2%. The API reported a small draw in distillate stocks. They also reported a marginal draw in gasoline stocks.
The API report is mixed and mostly biased to the neutral side for everything. The market is mostly lower heading into the US trading session and ahead of the EIA oil inventory report at 10:30 AM today. 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. The API reported a build of about 0.5 million barrels of crude oil with Cushing, Ok showing a small build of 0.1 million barrels while PADD 2 stocks increased by 0.6 million barrel which is bullish for the Brent/WTI spread. On the week gasoline stocks decreased by about 0.1 million barrels while distillate fuel stocks decreased by about 0.3 million barrels.
With the global economy and oil fundamentals becoming more the focus of the trading and investing community this week's oil inventory report could be a price catalyst especially if the actual outcome shows a large deviation from the projections. However, any inventory reaction is likely to be short lived as the main event for this week is still likely to be the markets focusing on the macroeconomics especially the US jobs report on Friday.
My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to hold relatively steady as the recovery from Isaac is offset somewhat by normal refinery maintenance getting underway. I am expecting a modest build in crude oil inventories, and a small build in both gasoline and distillate fuel stocks. I am expecting crude oil stocks to increase by about 1.5 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 25.7 million barrels while the overhang versus the five year average for the same week will come in around 36 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 $19.50/bbl premium to Brent level.
With refinery runs expected to decrease by 0.02% I am expecting only a small build in gasoline stocks. Gasoline stocks are expected to increase by 0.2 million barrels which would result in the gasoline year over year deficit coming in around 18.8 million barrels while the deficit versus the five year average for the same week will come in around 7.9 million barrels.
Distillate fuel is projected to increase by just 0.3 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 29.6 million barrels below last year while the deficit versus the five year average will come in around 24.2 million barrels.
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 in directional sync with this week's projections. As such if the actual data is in line with the projections there will not be a significant change in the year over year inventory comparisons.
The tropics are still quiet with no immediate threats to Nat Gas or oil producing operations in the Gulf of Mexico. However, as I have been mentioning the hurricane season is not yet over and as of this morning there is a tropical weather pattern about 1000 miles west-southwest of the Cape Verde Islands. It now has about an 80% chance of strengthening to a tropical cyclone over the next 48 hours. At this point in time the only action is to keep this pattern on the radar to see if it materializes and starts to move toward the US.
Oil has become more reasonably valued after about a 10% downside correction (basis WTI). WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. Both crude oils have bounced off of the lower end of the trading range as support has emerged from the refined products markets as well as from what seems to be a shifting sentiment in Europe. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics has moved toward the background for the short term.
I am keeping my Nat Gas price view at neutral with a bias to the upside as the market continues to react positively to the latest forecast for colder than normal temperature forecast. Event though current prices favor coal over Nat Gas (based on a macroeconomic comparison) the market is now more focused on the upcoming winter heating season and what it may do to Nat Gas demand.
Markets are mostly lower ahead of the US trading session as shown in the following table.
Dominick A. Chirichella