What are we waiting for? Volume in the oil market seems to suggest that the passion for making big trades is somewhat subdued. Could it be that we are waiting for a resolution to the US Presidential election or could it be as simple as the fact that we are in the heart of the shoulder season, after summer and before the start of winter. I think it is all of that but also the market is trying to find the balance between the bullish aspects of some recent better than expected economic data versus the negative impact of dwindling prospects for more dramatic economic stimulus going forward.
China’s data overnight is a perfect example. China’s gross domestic product expanded 7.4%, hitting 2.2% in the third quarter. While the number initially should improve oil demand expectations, some may worry that China’s warning about the possibility of renewed inflation may temper previous market expectations that China would have to act aggressively to juice up its slowing economy.
Of course the fate of China’s economy may not totally be in their hands as they count on Europe to buy their goods. The euro has rallied on the expectations that Spain will ask for a bailout. European leaders are going to be meeting in Brussels and their rhetoric may be a market moving event. While they are trying to downplay expectations of any major announcements at this meeting, based on this morning’s strong Spanish bond auction, the market is saying they expect not to be disappointed.
We also saw shockingly good housing starts and markets that rallied like lumber and copper, along with rising US yields. Yet oil was more focused on what looks almost like a glut of US crude supply. The Energy Information Administration reported that U.S. commercial crude oil inventories increased by 2.9 million barrels from the previous week. At 369.2 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. This build came on the back of imports that averaged over 8.3 million barrels per day last week, up by 126 thousand barrels per day from the previous week.
Yet at the same time a drop in distillates and a rise in gasoline supply had the "widow-maker," or the seasonally inspiring rollercoaster, long heating oil versus short gasoline spread absolutely explode. The Energy Information Administration reported that gasoline production increased last week, averaging more than 9.0 million barrels per day exceeding their demand estimate of 8.7 million barrels per-day. This helped the supply rise by 1.7 million barrels, which was led by what the EIA says was a dramatic increase in blending components. Yet at the same time we are seeing almost disturbingly tight supply of distillate. The EIA reported that distillate fuel inventories decreased by 2.2 million barrels last week and are below the lower limit of the average range for this time of year. Hi grade ultra-low-sulfur diesel stocks are a whopping 12.4 deficit from tear ago supplies after they tanked falling by 3.5 million barrels a week ago. Is it any wonder why the “widow-maker” spread is rocking?