Quote of the Day.
Friends are the family we chose for ourselves.
Edna Buchanan
Oil prices are little changed ahead of this morning's EIA oil inventory report and after what can only be described as a bearish API oil report last evening (see below for more details). Although the inventory reports are skewed because of the industry's handling of their end of year inventories the simple fact is stocks are building in the U.S. with supply growing at a much faster pace than demand. This pattern is expected to continue according to the latest EIA Short Energy Outlook report highlighted below.
Yes, crude oil prices have been trading in an upward trending price channel and both the spot Brent and WTI futures contracts are hovering near the upper resistance level of the trading channel. However, I do not see any major upside momentum that will carry oil prices to significantly higher levels in the short- to medium-term (barring a surprise geopolitical event).
The market seems to be discounting the bearish current fundamentals... just look at the API data compared to how the market is trading overnight... HO is up after a 5.9 million barrel build in distillate fuel stocks. Rather the market is focusing on what the forward fundamentals might be if in fact the global economy is turning the corner. That said I look at the EIA projection for US domestic crude oil production increasing by 900,000 bpd against a projection of total global oil demand supply growth of about 900,000 bpd for 2013 and it is hard for me to get overly bullish, even when looking at projected fundamentals.
With China representing about half of the projected increase in global oil consumption and the U.S. representing a major portion of the projected supply growth the macro fundamentals are now coming down to the U.S. as the incremental supplier versus China as the incremental consumer. With the economic recovery still very fragile... at best there is more downside risk to Chinese oil consumption than there is to U.S. oil E&P and thus oil production growth. I did not think I would be able to say this but the macro global supply and demand is coming down to U.S. and China...the part I did not think I would say is the U.S. part as the production success has been unprecedented.