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.
The EIA released their latest Short Term Energy Outlook yesterday afternoon. Overall I would view the report as bearish as they increased their projection of US domestic crude production strongly while still forecasting only a very slow increase in consumption over the next two years. On a global basis they are expecting global supply to offset higher global consumption for both 2013 and 2014. Following are the main oil related highlights from the report.
- EIA expects oil markets to loosen in 2013 and 2014 as increasing global supply more than offsets higher global consumption. Projected world supply increases by 1.0 million bbl/d in 2013 and 1.7 million bbl/d in 2014, with most of the growth coming from outside the Organization of the Petroleum Exporting Countries (OPEC). North America will account for much of this growth. Projected world liquid fuels consumption grows by an annual average of 0.9 million barrels per day (bbl/d) in 2013 and 1.3 million bbl/d in 2014. Countries outside the Organization for Economic Cooperation and Development (OECD) drive expected consumption growth.
- World liquid fuels consumption grew by an estimated 0.9 million bbl/d in 2012 to reach 89.2 million bbl/d. EIA expects that this growth will remain about the same over the next year before picking up again in 2014 due to a moderate recovery in global economic growth; consumption reaches 90.1 million bbl/d in 2013 and 91.5 million bbl/d in 2014. Non-OECD Asia is the leading regional contributor to expected global consumption growth. OECD liquid fuels consumption declined by 0.4 million bbl/d in 2012. EIA projects OECD consumption to further decline by 0.3 million bbl/d in 2013, as modest consumption growth in North America is more than offset by decreasing consumption in Europe. The OECD consumption decline narrows to 0.1 million bbl/d in 2014 as European consumption begins to flatten in response to higher economic growth. EIA projections do not assume any significant deterioration of the economic situation in the United States or the European Union (EU) next year.
- Although supply growth in the United States and Russia during 2012 outpaced our forecast at the beginning of the year, overall non-OPEC liquid fuels production fell below the year-ago expectations. EIA forecasts non-OPEC production to increase by 1.4 million bbl/d in 2013 and 1.3 million bbl/d in 2014, but assumptions about the mitigation of some of the current political impediments to production and the rapid evolution of the North American oil industry introduce considerable risks to the forecast. North America accounts for about two-thirds of the projected growth in non-OPEC supply over the next two years because of continued production growth from U.S. tight oil formations and Canadian oil sands.
- EIA expects U.S. crude oil production to continue to grow rapidly over the next two years, increasing from an average 6.4 million bbl/d in 2012 to average 7.3 million bbl/d in 2013, an increase of about 0.3 million bbl/d from last month's STEO, and 7.9 million bbl/d in 2014. Central to this projected growth will be ongoing development activity in key onshore basins. Drilling in tight oil plays in the Williston, Western Gulf, and Permian Basins is expected to account for the bulk of forecast production growth over the next two years.
- EIA expects that OPEC members will continue to produce at least 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil consumption and to counterbalance supply disruptions. However, OPEC crude supply decreases by 0.6 million bbl/d in 2013 and stays flat through 2014. Most of the decrease in 2013 comes from Saudi Arabia, which responds to non-OPEC growth and increasing production from some OPEC members, such as Iraq, Nigeria, and Angola.
- EIA estimates that OECD commercial oil inventories ended 2012 at 2.67 billion barrels, equivalent to 58 days of supply. Projected OECD oil inventories remain relatively flat throughout the next year and end 2013 at 2.66 billion barrels (58 days of supply). Inventories grow to 2.69 billion barrels (59 days of supply) by the end of 2014.
The API report was simply bearish showing much larger builds of refined products than the range of expectations. The crude oil build was within the expectations for more modest draw. Gasoline showed a larger than expected build in inventory while distillate fuel stocks surged versus an expectation for a smaller build. The API reported a build (of about 2.4 million barrels) in crude oil stocks versus an industry expectation for a modest draw as crude oil imports increased even as refinery run rates decreased by 1.6%. The API reported a strong build in distillate and a build in gasoline stocks.
The API report is bearish as the build in crude oil stocks is primarily a function of end of the year LIFO or inventory management that normally happens every year and is starting to make up for the large end of the year decline already seen. Over the next several weeks I would expect to see crude oil imports and stocks to continue to rebuild as the industry readjusts back to more normal inventory operating levels. That said the fact that there was such a large deviation from the expectations will make this morning's EIA inventory report much more interesting. The oil market is mixed 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 2.4 million barrels of crude oil with PADD 2 stocks increasing by 1.5 million barrels while Cushing stock increased by 0.3 million barrels. On the week gasoline stocks increased by about 7.9 million barrels while distillate fuel stocks decreased by about 5.9 million barrels.
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 maintenance. I am expecting a modest build in crude oil inventories after last week's large LIFO inventory draw, a build in gasoline and in distillate fuel stocks as the weather was still not winter like over the east coast during the report period. I am expecting crude oil stocks to increase by about 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 32.2 million barrels while the overhang versus the five year average for the same week will come in around 44.3 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok as the Seaway pipeline has been shut as the operator ready's for restart later this week at an increased capacity of 400,000 bpd. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading at its lowest level since late October. 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 Brent/WTI spread still trading around the $18.60/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 later this week.
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 million barrels which would result in the gasoline year over year surplus coming in around 6.5 million barrels while the surplus versus the five year average for the same week will come in around 11.5 million barrels.
Distillate fuel is projected to increase by 1.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 18.1 million barrels below last year while the deficit versus the five year average will come in around 17.1 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 and keeping my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are still suggesting that the market could be setting up for a breakout move to the upside as both WTI and Brent are hovering near the channel upside breakout level. 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.
I am maintaining my Nat Gas view at cautiously bearish as the fundamentals and technicals are now suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to possibly test the $3/mmbtu support level if the actual temperatures are in sync with the latest NOAA forecasts. 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 bearish.
Markets are mostly lower heading into the US trading session as shown in the following table.
Best Regards,
Dominick A. Chirichella
