Quote of the Day.
A bad beginning makes a bad ending.
Euripides
The U.S. fiscal cliff negotiations or should I say the lack of a deal just yet resulted in an early day rally on Tuesday stalling by the afternoon and sending equities and oil into negative territory for the day. Comments from both sides in the media created more uncertainty for market participants sending the weak longs to the sidelines. The markets are playing out as I have been suggesting for weeks... higher than normal volatility and sudden price reversals for nothing other than comments over the media airwaves. This pattern will continue until there is a clear signal that a deal has been reached. At the moment most traders and investors have a very short term horizon and seem very unwilling to sit with any major position for any length of time.
Overnight we have seen a modest rebound in equities and oil prices on comments from the newly installed Chinese government indicating that they will keep their macroeconomic policies stable making adjustments as needed. Market participants in Asia took that as a positive sign resulting in a rally in most Asian equity markets that has carried over into European trading. Just about every area of the global economy is fragile at best with some areas showing signs of stability. The macroeconomic data over the next month or so will be very telling as to whether what looks like stability in some areas is truly the beginning of a turning point or simply a continuation of the slow growth pattern that has been in play for well over a year.
For example in the U.S. the ever important nonfarm payroll data will be released on Friday. The market is currently expecting 90,000 new jobs created with the headline unemployment number coming in at 8%. If the actual number is in sync with the expectations it will certainly not be a very robust outlook and one that suggests the U.S. economy is still not creating nearly enough jobs to simply keep up with the new entrants into the economy let alone impacting the large numbers of people already out of work.
Global equities were about unchanged over the last 24 hours with the U.S. and western markets falling yesterday but offset by the rebound in Asia overnight. The EMI Global Equity Index is still showing a small 0.3% gain for the week with the year to date gain currently at 7.1%. Not much changed in the ranking other than China's year to date loss has narrowed modestly to 7.6%. Global equities have been a neutral for oil prices and the broader commodity complex over the last twenty four hours.
On the fundamental front the first batch of data released last night... the API inventory report was mixed (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 still biased to the bearish side.
The API report was mixed and not in directional sync with the range of expectations. Crude oil showed a larger than expected draw. Gasoline showed a much larger than expected build in inventory while distillate fuel also built versus an expectation for a modest draw. The API reported a draw (of about 2.2 million barrels) in crude oil stocks versus an industry expectation for a smaller draw as crude oil imports increased while refinery run rates increased strongly by 2.1%. The API reported a modest build in distillate and large increase in gasoline stocks.
The API report is mixed to bearish with many participants now looking at this morning's EIA inventory report with much more interest. The oil market is stable 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 draw of about 2.2 million barrels of crude oil with PADD 2 stocks declining by 0.2 million barrels. On the week gasoline stocks increased by about 5.7 million barrels while distillate fuel stocks increased by about 1.1 million barrels.
With geopolitics less of an issue or price driver than it was the last few weeks 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 draw in crude oil inventories, a build in gasoline and a small draw in distillate fuel stocks as the weather was modestly colder than normal over the east coast during the report period. I am expecting crude oil stocks to decrease by about 0.5 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 37.5 million barrels while the overhang versus the five year average for the same week will come in around 42.8 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 $21.5/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 0.2% 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 9.9 million barrels while the deficit versus the five year average for the same week will come in around 4.7 million barrels.
Distillate fuel is projected to decrease by 0.3 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 29.3 million barrels below last year while the deficit versus the five year average will come in around 34.6 million barrels.
The table below 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 modest changes in the year over year inventory comparisons for just about everything in the complex.
I am keeping my view at neutral and maintaining my bias toward the cautiously bullish side as the oil markets may get a boost from what seems to be a slightly changing sentiment coming from the financial markets. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East remains in the price in anticipation of a spreading of the civil war in Syria as well as the ongoing concerns over Iran's nuclear program. In the short term the price of oil will move based more on the markets view of the global economy, the US fiscal cliff negotiations and less so on the geopolitics. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are once again suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... especially after last week's bearish inventory snapshot. 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 and currently those forecast are all mostly bearish.
Markets are mostly higher heading into the US trading session as shown in the following table.
Best Regards,
Dominick A. Chirichella
