Quote of the Day.
The most important thing is to enjoy your life, to be happy, it's all that matters
Audrey Hepburn
The slowing of the global economy continues to be the dominant price driver for the oil complex as well as most all risk asset markets. Yesterday there was a plethora of corporate earnings, revenue and guidance misses that brought even more focus to the simple fact that the global economy is going nowhere quick and now it is starting to be reflected in many corporate earnings reports. This sent the U.S. equity market into a tailspin on Tuesday that subsequently sent the oil complex into a tailspin on concern that oil demand growth is also going to slow further. The majority of the macroeconomic data have been pointing to a slow economic growth period on the horizon and now that has trickled down to the corporate sector as many companies are not only missing estimates this quarter but their guidance is projecting further declines in revenue with many of the companies blaming the slow growth global economy.
Today the latest PMI manufacturing data out of Europe and in particular Germany showed another decline. Germany's flash Oct PMI manufacturing index came in at 45.7 versus 47.4 for September. The EU came in at 45.3 for October versus 46.1 for September. Not only do these data points support the slowing economic scenario, but the PMI manufacturing index is an energy sensitive index and directly translates to slower energy demand going forward. Even the main growth engine of Europe... Germany is also joining the rest of the global economies in seeing its economy starting to slow.
On a positive note, China's flash PMI manufacturing gauge actually increased to 49.1 for October versus 47.9 for September. There have been a few data points out of China over the last two weeks that suggest that the main global economic and oil demand growth engine could possibly be in the early stages of bottoming. Today's flash PMI data suggests that even though it is still below the manufacturing expansion threshold of 50. Certainly any signs that China has stopped contracting would be a major support for the rest of the global economies and definitely a positive for the oil complex as well as for the broader risk asset markets.
All of the above said I think it is way too early to conclude that the global economy has stopped slowing or contracting. However, the data out of China is a tad encouraging. Today the U.S. Fed will conclude their two day FOMC meeting. I am expecting the Fed to keep its short-term interest rate policy as well as QE3 and Operation Twist in place with no changes. I am also expecting the Fed to suggest that the U.S. economy is still struggling and the aforementioned Fed policy remains warranted.
Global equity markets lost ground over the last 24 hours as shown in the EMI Global Equity Index table below. Heavy selling originated in the U.S. during Tuesday's trading session but the selling seems to have subsided a bit during the Asian trading session as well as during the European session so far. The improvement in China's flash PMI Index stabilized Asia a tad and that has carried over to Europe even though Europe's data was not as encouraging as China. The Index lost about 1% over the last 24 hours narrowing the year to date gain to 6.2%. The Index has now lost 1.5% on the week pushing the Index to the lowest level since the first half of September. Only Germany, Hong Kong and Australia are still showing double digit gains for 2012 with China still in negative territory for the year and at the bottom of the EMI leader board. Yesterday was a good example of the tight macro correlations among most all risk asset markets as a sell-off in equities quickly translated to a sell-off in the oil complex as well as in the broader risk asset markets.
The API report was mixed with the outcome in directional sync with the range of expectations. The crude oil build was smaller than expected as was the gasoline build while distillate fuel inventories declined within the expectations for a modest draw. The API reported a build (of about 0.3 million barrels) in crude oil stocks versus an industry expectation for a larger build as crude oil imports declined marginally while refinery run rates also decreased slightly by 0.2%. The API reported a modest draw in distillate stocks. They also reported a small build in gasoline stocks.
The API report is mixed and mostly neutral weekly inventory snapshot. The market is a bit higher heading into the US 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 0.3 million barrels of crude oil with Cushing, Okla. showing a small build of 0.07 million barrels while PADD 2 stocks decreased by 0.9 million barrels primarily as a result of the loss of two days of flow from the Keystone Pipeline during the report period. On the week gasoline stocks increased by about 0.2 million barrels while distillate fuel stocks decreased by about 0.9 million barrels.
My projections for this week’s inventory report are summarized in the following table. I am expecting the U.S. refining sector to increase marginally as the refining sector 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 1.4 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 33 million barrels while the overhang versus the five year average for the same week will come in around 37.5 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 U.S. In addition the loss of about 1.2 million barrels from the shutdown of the Keystone pipeline will impact this week's inventory in the PADD2 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 a relatively high premium to Brent but off of the highs hit about a week or so ago. 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 $20/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.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 0.8 million barrels which would result in the gasoline year over year deficit coming in around 7 million barrels while the deficit versus the five year average for the same week will come in around 6.4 million barrels.
Distillate fuel is projected to decrease by 0.7 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 27.5 million barrels below last year while the deficit versus the five year average will come in around 30.9 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 modest change in the year over year inventory comparisons.
The tropics remain active but not threatening to oil or Nat Gas operations with two weather patterns in play... one in the Caribbean and one still out in the eastern Atlantic. The pattern that is around Jamaica now has been upgraded to Tropical Storm Sandy. The current models do not show this pattern heading into the US Gulf. Rather it will move north and then west and out into the Atlantic. The other pattern... Tropical Storm Tony is out in the Atlantic and will remain out in the Atlantic. At the moment neither weather event is a threat to US oil and Nat Gas operations... but they are still worth keeping on the radar in the event that the pattern changes.
I am downgrading my overall view for the oil complex to cautiously bearish now that the spot WTI contract has breached its range support that has been in play since mid-September. The new resistance level is the old range support level of $87/bbl. 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 have 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 once again keeping the overall market well bid. As I have previously mentioned the market appears to still be in a buy the dip mode.
Markets are mostly higher heading into the US trading session as shown in the following table.
