Quote of the Day.
Treasure your relationships, not your possessions.
Anthony J. D'Angelo
A sprinkle of optimism coming from Europe coupled with some early corporate earnings reports that came in better than expected was enough to send the equity markets into a decent one day rally that spread to the oil sector and other key commodity sectors. Comments out of Germany suggesting that they may ease their objection or resistance to a Spanish bailout sent a message to the market that the EU Ministers meeting on Thursday and Friday could now make progress in taking another step in solving the EU sovereign debt issues. In addition the better than expected earnings from Goldman and several other early reporters helped push most all risk asset markets higher as market participants regained a bit of confidence that the economy may be starting to stabilize.
On the global equity front, for the first time in a long time all ten bourses in the EMI Global Equity Index (shown below) increased in value. The Index is higher by 1.3% for the week with three trading sessions yet to go. The year-to-date gain has widened to 8% and is now at the highest level since the third week in September. There are now five bourses that are showing double digit gains for the year with Germany remaining the highest gaining bourse in the Index for 2012. The global equity markets have been a positive price driver for the oil complex as well as the broader commodity complex for the entire week so far.
The API report was mixed and not in sync with the range of expectations. The crude oil build was much higher than expected while gasoline showed a surprise draw versus an expectation for a modest build while distillate fuel inventories built strongly versus and expectation for a modest draw. The API reported a build (of about 3.7 million barrels) in crude oil stocks versus an industry expectation for a much smaller build as crude oil imports increased strongly while refinery run rates decreased modestly by 0.6%. The API reported a strong build in distillate stocks. They also reported a modest draw in gasoline stocks.
The API report is mixed and mostly biased to the bullish side for gasoline but bearish for both crude oil and distillate fuel. The market is mixed heading into the Asian trading session and ahead of the EIA oil inventory report at 10:30 AM tomorrow. 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 3.7 million barrels of crude oil with Cushing, Okla. showing a draw of 0.14 million barrels while PADD 2 stocks decreased by 0.3 million barrels which is slightly bearish for the Brent/WTI spread. On the week gasoline stocks decreased by about 1.2 million barrels while distillate fuel stocks increased by about 1.8 million barrels.
My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as it begins the process of returning from fall maintenance programs. I am expecting a modest build in crude oil inventories, and a build in gasoline and another draw in distillate fuel stocks as the weather was colder than normal over the east coast during the report period. 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 35 million barrels while the overhang versus the five year average for the same week will come in around 35.6 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Okla. as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would normally be bearish for the Brent/WTI spread in the short term but the spread is currently trading at the highest premium to Brent in over a year. The slow return from maintenance in the North Sea has been the main driver that has resulted in the Nov Brent/WTI spread now trading over the $24/bbl level as of this writing. The widening of the spread should begin to ease once the North Sea returns to a more normal production level over the next month or two.
With refinery runs expected to increase by 0.2% I am expecting a 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 9.9 million barrels while the deficit versus the five year average for the same week will come in around 8.2 million barrels.
Distillate fuel is projected to decrease 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 29.9 million barrels below last year while the deficit versus the five year average will come in around 30.3 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 not in directional 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 inventory comparisons.
The oil complex has breached all of its current support levels and as such I am keeping my view at neutral for today as crude oil continues to trade within a wide trading range (see above for more comments). 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 continued to remain an issue for market participants.
I am keeping my Nat Gas price view at neutral with bias to the bullish side as the fundamentals and technicals are quickly catching up the current price levels. As I mentioned above the market appears to be moving into a buy the dip mode
Markets are mostly lower heading into the Asian trading session as shown in the following table.
Dominick A. Chirichella