Smile more than you cry, give more than you take, and love more than you hate.
Oil prices remain relatively range bound since the third week of October. The spot WTI contract has traded between $84/bbl to $88/bbl for the last 17 trading sessions. Similarly the spot Brent contract has been trading in a range of $105/bbl to about $112/bbl over the same timeframe. Volatility has been relatively low compared to most of 2012 even in an environment with major uncertainty coming from the major economies of the world.
From a fundamental perspective yesterday's IEA monthly oil report was just another monthly reminder that global oil demand is continuing to wane as supply is continuing to grow. The balances have been biased to the bearish side and are likely to remain biased to the bearish side barring any unforeseen geopolitical event arising in the Middle East. There have been some early signs of an increase in imports into China but it is not clear to me whether that is due to an increase in demand or partially a continuation to fill their SPR. With China's two largest export markets — Europe and the U.S. — both struggling it is hard to see any major growth spurt in Chinese oil consumption from a manufacturing perspective.
Europe (China's number one export market) does not seem to be any closer to putting their four year old sovereign debt issues into the background permanently. Just today Spanish and Portuguese workers are holding their first joint general strike while unions in Greece, Italy, France and Belgium are also holding work stoppages as part of a "European Day of Action and Solidarity" (as reported by Reuters). It certainly does not look like stability between the populace and the governments in the EU is coming anytime soon.
This has been festering for about four years with the governments trying to solve their debt issues with spending cuts in a region where government spending has hardly been challenged in the past. Austerity in Europe is helping the debt problems but it is not doing much for the faltering economy nor for the protesting populace who have been accustomed to a plethora of social programs in Europe. A dilemma that does not look like it will go away anytime soon and thus a likelihood that the EU economy will continue to falter and have a negative impact on oil demand growth.
In the U.S., the confidence level in the politicians (including the President ) to solve the so called fiscal cliff before the end of the year is not very high. The first meeting between the re-elected President and the Congress will occur on Friday. Both sides have sort of blinked indicating that they might compromise on a solution involving both tax increases and spending cuts. This uncertainty along with the uncertainty coming from social programs like the implementation of Obamacare are keeping many companies on the hiring sidelines and thus the lingering unemployment situation does not look like it will be solved anytime soon. Net result is that the US economy is also faltering as evidenced by the macroeconomic data as well as the performance of the equity markets over the last several months.
I am still of the view that the fiscal cliff will be avoided and President Obama and the Congress will drill down to a deal over the next several weeks. I do not think the President will want to start his next and last term in office (or what many refer to as a President's legacy term in office) with what would likely be another recession if the fiscal cliff hits (based on the projections of many economists). He is never going to run for office again and will likely be much more willing to negotiate a deal.
On the other side of the aisle I do not think the Republican controlled House will want to be blamed for sending the US economy into another recession by holding firm on not raising taxes on those making more than $250k per year. Nor will they want to start a new cycle with a whole lot of negativity after having lost the current election. So yes they will make a deal and move on to the real problem in the US the faltering economy and persistently high unemployment problem.
A solution to the fiscal cliff would be a positive for the equity market in the US and likely have a positive impact on most global equity markets. It could also move the attention of market participants back to the many stimulus or quantitative easing programs around the world and how they may or may not impact inflation and thus commodity (including oil) values over the next several months as there are no signs that QE3 in the US, QE in the UK and Japan (in fact Japan may once again increase the size of their QE program) are going to end anytime soon. They are more likely to last though a major portion of 2013.
Global equities recovered some of their lost value but are still lower on the week as shown in the EMI Global Equity Index below. The Index gained about 0.4% over the last twenty four hours with the gains coming mostly from Asia and Brazil while most western bourses lost more ground. Not much has changed in the overall ranking of the bourses in the Index with Germany still clearly the leader of the pack followed by Hong Kong which is also showing double digit gains for the year. Overall global equities have been a negative price driver for oil and the broader commodity complex.
The weekly oil inventory cycle will be moved by one day due to the US government holiday on Monday. The weekly oil inventory cycle will begin with the release of the API inventory report on Wednesday afternoon and with the more widely followed EIA oil inventory report being released Thursday morning at 11 AM EST. With the global economy and oil fundamentals continuing to be the main 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 could be short lived if the macroeconomic data, the fiscal cliff and Greece remain the main focus of most market players.
My projections for this week’s inventory report are summarized in the above table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from the recent storm on the east coast. I am expecting a modest build in crude oil inventories, 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 2.3 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 40.1 million barrels while the overhang versus the five year average for the same week will come in around 45.2 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is still 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 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 $23/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.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.0 million barrels which would result in the gasoline year over year deficit coming in around 1.8 million barrels while the surplus versus the five year average for the same week will come in around 0.3 million barrels.
Distillate fuel is projected to decrease by 0.4 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 16.1 million barrels below last year while the deficit versus the five year average will come in around 26.6 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 mostly in directional sync with this week's projections (except for crude oil). 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 for crude oil.
I am maintaining my overall view for the oil complex at 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 as the fundamentals and technicals are once again keeping suggesting that the market may have topped out for the short term. I anticipate that the market will remain in a trading range until it becomes clearer as to how the heating season will evolve.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella