Quote of the Day.
Obstacles are those frightful things you see when you take your eyes off your goal.
As the last major event of 2012...U.S. fiscal cliff negotiations... continues to inch closer to some sort of deal, oil prices as well as most risk asset market have been in a modest uptrend this week so far. Further supporting crude oil prices in overnight trading was the larger than expected decline in crude oil stocks reported by the API late yesterday afternoon (see below for a more detailed discussion). While the negotiations continue in the U.S. today's EIA inventory report could move into a position to have an impact on the short term direction of prices especially if the actual outcome is outside of the range of expectations. Today the spot Jan Nymex WTI contract expires.
The macroeconomic calendar is drying up pretty quickly as we head toward the long Christmas holiday period beginning next week. Today the German business confidence indicator rose more than expected providing a modest level of support for the euro as well as European equity markets. The euro has risen for eight days in row and is a positive price support for the oil complex as the euro and oil prices have a high level of directional correlation.
As I have been discussing in this report for weeks there will be some sort of deal to prevent the U.S. fiscal cliff from triggering at the end of the year. Both side have been talking (which is always a good thing) and both side have made some concessions from their original position... although they are still not close enough to call it a deal. The Republicans will be voting on a so called “Plan B” later this week to be used in the event that a deal is not reached. The Plan B calls for extending the tax cuts for all income levels up to $1 million dollars per year. If passed (which it will be as the Republicans hold the majority in the House) this could offset the fiscal cliff if a deal is not reached and as long as the President does not veto the bill.
This is not a bad strategy by the Republicans as it would then put the decision to allow the fiscal cliff to trigger squarely in the hands of the President. Interestingly this is also a plan that high ranking Democrats have suggested during the course of this year... including House Minority Leader Pelosi and Senator Schumer that they agree with and support. The game of give and take will continue for a few more days as both sides try to get a deal done with the most gains for their respective side. The global risk asset markets have been trading more and more based on a view that a deal will get done. I remain of that view.
Global equities continue to add value as shown in the EMI Global Equity Index table below. The EMI Index is now higher by 1.4% for the week resulting in the year to date gain moving into double digit levels for the first time since late March of this year. The Index is now showing a gain of 11.1% for 2012 with only the Chinese bourse still in negative territory but by just 1.7%. Germany remains on top of the leader board with its year to date gain crossing the 30% threshold while both Hong Kong and Japan are both above the 20% threshold level of 2012 gains. The global equity markets are not only building in a solution to the US fiscal cliff but they are sending a message that the global economy may be on the cusp of a year of higher quality and more sustained growth in 2013.
The API report was mixed but biased to the bullish side and not in directional sync with the range of expectations. Crude oil showed a much larger than expected draw compared to expectations for a more modest draw. Gasoline showed a larger than expected build in inventory while distillate fuel declined versus an expectation for a small build. The API reported a draw (of about 4.1 million barrels) in crude oil stocks versus an industry expectation for a modest draw as crude oil imports decreased while refinery run rates increased by 1.1%. The API reported a modest draw in distillate and a build in gasoline stocks.
The API report is bullish with many participants now looking at this morning's EIA inventory report with much more interest. The oil market is higher 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 4.1 million barrels of crude oil with PADD 2 stocks increasing by 1.7 million barrels while Cushing stock increased by 0.1 million barrels. On the week gasoline stocks increased by about 4.2 million barrels while distillate fuel stocks decreased by about 1.9 million barrels.
With geopolitics less of an issue or price driver than it was the last month or so the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. 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 in distillate fuel stocks as the weather was mostly warmer than normal over the east coast during the report period. I am expecting crude oil stocks to decrease by about 0.9 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 37.6 million barrels while the overhang versus the five year average for the same week will come in around 45.6 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is still pumping and refinery maintenance programs in the region are mostly over. This will be bearish 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 $20/bbl level as of this writing. The narrowing of the spread should begin to ease once the North Sea returns to a more normal production level, the situation in the Middle East quiets down and the expanded capacity of the Seaway pipeline starts flowing in January.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.5 million barrels which would result in the gasoline year over year deficit coming in around 0.2 million barrels while the surplus versus the five year average for the same week will come in around 6.6 million barrels.
Distillate fuel is projected to increase by 1.1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 22.3 million barrels below last year while the deficit versus the five year average will come in around 26.9 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 mostly in directional sync with this week's projections. As such if the actual data is in line with the projections there will be only small changes in the year over year inventory comparisons for just about everything in the complex.
I am maintaining my view at neutral but upgrading my bias to cautiously bullish as the current fundamentals are still biased to the bearish but the forward view of 2013 fundamentals are starting to look more supportive. In addition the technicals are indicating that the selling momentum has eased as the market is has now moved into a higher level trading range over the last two days.
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 is continuing to slowly recede from the price of oil. But as discussed above the market seems to be paying less attention to the nearby fundamentals. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. This is still an event driven market for oil at the moment.
I am upgrading my Nat Gas view to neutral with a bias toward the cautiously bearish side as the fundamentals and technicals are now suggesting that the market may be heading higher for the short term. I anticipate that the market is now positioned to test remain in the new higher trading range... even after the latest supportive temperature forecast. 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 heart of the winter heating season and currently those forecasts are now switching to a more bullish scenario.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella