Quote of the Day.
There is no passion to be found in settling for a life that is less than the one you are capable of living.
Nelson Mandela
Now that a deal has been reached to provide the next batch of financial aid to Greece, the market has turned its attention to the U.S. fiscal cliff negotiations. Yesterday afternoon the financial markets were hit with a round of selling on talk that the politicians in Washington are still struggling to come up with a deal acceptable to both sides. The market is now in the 30 second news snippet mode hitting the media airwaves on comments from all sides of the negotiations. In fact there have been no negotiations this week (so far) with the President and Congress seemingly approaching the situation as if the campaign for re-election was still going on.
In my view it is time for the President and Congress to sit in a room and iron out a deal and not leave the room until it is done. This process has been going on way too long and has been creating uncertainty at every level of the U.S. economy. That said I am still of the view that a deal will be done before the end of the year deadline. Unfortunately for all market participants the process will not be smooth and games will be played and aired out in the media thus increasing the volatility of all markets over the next several weeks. Obviously the oil complex will be impacted in both directions by any and all of the 30 second news snippets hitting the media airwaves.
Global equity markets have been on the defensive since the trading week began as shown in the EMI Global Equity Index table below. The Index lost another 0.7% over the last 24 hours with all bourses losing value... mostly driven by the lack of a deal in the US. The Index has now lost about half of last week's gains and is down by 1.5% for the week to date. The year to date gain has narrowed to 5% with two bourses now in negative territory for 2012... China and Brazil. However, there are still four bourses still showing double digit gains for the year. The global equity markets have been a negative price drive for the oil complex as well as the broader commodity complex so far this week.
With the geopolitical situation in the Middle East quieter than it was over the last several weeks it has moved from being the main oil price driver to a secondary one. The global economy and oil fundamentals have now moved back into the forefront. As mentioned above the main issue that traders and investors are looking at regarding the faltering global economy is whether or not the US politicians will be able to strike a deal to prevent the fiscal cliff by the end of the year. For the moment this driver is biased to the negative side.
On the fundamental front the first batch of data released last night... the API inventory report was anything but bullish (see below for more details). US inventories are still well above both last year and the five year average or simply put oil is well supplied globally with no shortage of oil any place in the world. Oil fundamentals are also biased to the bearish side.
The API report was bearish on all fronts and in directional sync with the range of expectations. Crude oil showed a larger than expected build. In addition both gasoline and distillate stocks showed modest builds in inventory versus an expectation for a smaller build in gasoline stocks and a build in distillate fuel inventories within the range of expectations. The API reported a build (of about 2 million barrels) in crude oil stocks versus an industry expectation for a build as crude oil imports decreased marginally while refinery run rates increased strongly by 1.4%. The API reported a modest in distillate and gasoline stocks.
The API report is bearish across the board with many participants now looking at this morning's EIA inventory report with much more interest. The oil market is 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 2 million barrels of crude oil with PADD 2 stocks building by 0.3 million barrels. On the week gasoline stocks increased by about 2.3 million barrels while distillate fuel stocks increased by about 0.3 million barrels.
With geopolitics less of an issue or price driver than it was last week the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals a close second. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
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 the refining sector continues to return to normal from maintenance. I am expecting a modest build in crude oil inventories, a build in gasoline and a small build in distillate fuel stocks as the weather was only marginally colder than normal over the east coast during the report period. I am expecting crude oil stocks to increase by about 1.2 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 41 million barrels while the overhang versus the five year average for the same week will come in around 42.1 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok even as the Seaway pipeline is still pumping. However, refinery maintenance programs in the region are resulting in a building in crude oil stocks. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading at a relatively high premium to Brent and very near the highs recently hit. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Jan Brent/WTI spread still trading around 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 and the situation in the Middle East quiets down.
With refinery runs expected to increase by 0.3% 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 8.4 million barrels while the deficit versus the five year average for the same week will come in around 4.5 million barrels.
Distillate fuel is projected to decrease by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 25.2 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 mostly in directional sync with this week's projections. As such if the actual data is in line with the projections there will be minimal changes in the year over year inventory comparisons for crude oil.
I am keeping my view at neutral with a bias to the neutral side for today primarily due to the evolving geopolitical situation in the Middle East and the Greek deal on financial aid. At the moment there is still no shortage of oil anyplace in the world and the part of the risk premium in the price of oil in anticipation of a spreading of the fighting taking place between Israel and Hamas as well as the civil war in Syria is still in place.
The geopolitical risk has been the main bullish price driver for oil as the current fundamentals as well as the slowing of the global economy are both biased to the bearish side for oil. In the short term the price of oil will move based on the evolution of the situation in the Middle East and the markets view as to the state of the global economy. This is still an event driven market for oil at the moment.
I am keeping my Nat Gas price view at neutral as the fundamentals and technicals are once again 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. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the early stages of the winter heating season.
Markets are lower heading into the US trading session as shown in the following table.
Best Regards,
Dominick A. Chirichella
