Oil expects bearish inventories as OPEC sees little growth in 2013

January 16, 2013 04:02 AM

Quote of the Day.

We become what we think about all day long.

Ralph Waldo Emerson

In spite of market participants focusing more of their attention on the perception of what global oil demand might be down the road, the nearby fundamentals remains mostly biased to the bearish side. Last night's API oil inventory report was neutral to bearish after another large build in gasoline stocks (see below for more details). Yesterday the World Bank issued their latest global forecast suggesting that the global economy is still fragile as high income countries continue to suffer from volatility and slow growth.

The World Bank estimates global GDP grew 2.3% in 2012. Growth is expected to remain broadly unchanged at 2.4% growth in 2013, before gradually strengthening to 3.1% in 2014 and 3.3% in 2015. Developing countries recorded among their slowest economic growth rates of the past decade in 2012, with GDP estimated to have grown 5.1%. Growth for developing countries is projected to expand by 5.5% in 2013, strengthening to 5.7% and 5.8% in 2014 and 2015, respectively.

Growth in high-income countries remains weak, with their GDP expanding only 1.3% in 2012 and expected to remain slow at an identical 1.3% in 2013. Growth should gradually firm to 2% in 2014 and 2.3% by 2015. In the Euro area, growth is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1% in 2013, before edging up to 0.9% in 2014 and 1.4% in 2015. While diminished, downside risks to the global economy persist and include a stalling of progress on the Euro Area crisis, debt and fiscal issues in the United States, the possibility of a sharp slowing of investment in China, and a disruption in global oil supplies. On the premise that the global economy performs as projected by the World Bank 2014 is likely to be another year of supply outstripping demand especially supply coming from non-OPEC countries like the United States.

If oil demand growth continues to languish and non-OPEC supply continues to rise it would seem that the pressure will be on OPEC in 2013 and in particular on Saudi Arabia who will likely have to cut production for a second time. The Saudi's cut production in November based on slowing demand for their crude oils.

On the supportive side the North Sea Brent pipeline system remains shut-in after an oil leak was discovered on Jan. 14 at a platform connecting to the field. The combination of the Brent logistics problems with what should be another build in both Cushing and PADD 2 crude oil stocks this week should keep the Brent/WTI spread supportive for the short term even though Seaway is now pumping at an expended rate of 400,000 bpd. The expiring Feb Brent/WTI spread has been steadily declining since peaking around $22/bbl in late November in anticipation of the additional barrels moving from the Midwest via Seaway as well as by rail.

OPEC just released their latest monthly Oil Market Report. Following are the main highlights from this report.

World economic growth is estimated at 3.0% in 2012 and 3.2% in 2013, unchanged from the previous report. Following last month’s revision, U.S. growth expectations for 2013 remain at 2.0%, down from an upwardly-revised 2.3% for last year. In Japan, fiscal and monetary stimulus might lift growth to 0.7%, after an estimated expansion of 2.0% in 2012. The Eurozone is still forecast to recover to 0.1% after contracting by 0.4% last year. China is benefiting from increasing global trade and is forecast to expand by 8.0% in 2013, following 7.6% growth in 2012. After 5.5% growth last year, India is expected to grow at a higher 6.4% in 2013.

The forecast for world oil demand growth in 2013 remains unchanged at 0.8 mb/d, in line with the growth seen in the previous year. This year, the impact of economic turbulence on oil demand should be considerably milder than in previous years. The OECD region is expected to continue to contract this year by 0.2 mb/d, although at only half the rate seen in 2012. The non-OECD region is projected to consume about 1 mb/d more than last year. Transportation and industrial sectors are expected to provide most of the consumption this year and to be the source of most of the growth.

Non-OPEC oil supply growth in 2012 is estimated at 0.5 mb/d, broadly in line with the previous assessment. In 2013, non-OPEC supply is expected to increase by 0.9 mb/d. Growth is seen coming mainly from the U.S., Canada, South Sudan and Sudan, Brazil, and Australia, while Norway, Mexico, Syria, and the UK are seen declining in 2013. OPEC NGLs are expected to increase by 0.2 mb/d in 2013. In December 2012, total OPEC crude production averaged 30.37 mb/d, according to secondary sources, indicating a decline of 465 tb/d from the previous month.

Demand for OPEC crude in 2012 saw only a marginal revision from the previous assessment to stand at 30.1 mb/d, representing a decline of 0.2 mb/d from the previous year. Required OPEC crude in 2013 is forecasted to average 29.6 mb/d, down 0.4 mb/d from the previous year, following a downward adjustment of 0.1 mb/d from the previous report.

Preliminary data for November shows that total OECD commercial oil stocks experienced a seasonal decline of 15.3 mb. Despite the fall in total stocks, inventories showed a surplus of 16.0 mb compared to the five-year average. However, components differed with crude showing a gain of 51 mb and products a draw of 29 mb. In days of forward cover, OECD commercial stocks stood at nearly 58 days in November, a gain of almost two days over the five year average. U.S. total commercial oil stocks fell in December by 3.0 mb, but still showed a surplus of 35 mb over the five year average. The decline was attributed to crude, which fell by 11.8 mb, while products rose 8.8 mb.

Global equity markets are back on the defensive giving back most of this week's gains over the last 24 hours as shown in the EMI Global Equity Index table below. The EMI Index is now only 0.1% higher for the week with the year to date return narrowing to 1.9%. Seven of the ten bourses in the Index lost ground overnight but all remain in positive territory for the year to date. So far in 2013 global equities have been a positive price driver for the oil markets as well as the broader commodity complex.

Yesterday's API report was neutral to bearish showing a much larger build for gasoline stocks but no builds for either crude oil or distillate fuel. Total crude oil stocks were about unchanged versus an expectation for a modest build. Gasoline showed a larger than expected build in inventory while distillate fuel stocks declined versus an expectation for a small build. The API reported no change in crude oil stocks versus an industry expectation for a modest draw as crude oil imports decreased and as refinery run rates decreased by 0.9%. The API reported a small draw in distillate and a build in gasoline stocks.

The API report is neutral to bearish as the adjustments for the end of the year seem to be starting to return to normal. However, over the next several weeks I would expect to see crude oil imports and stocks to continue to rebuild as the industry readjusts. 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 no change in total crude oil with PADD 2 stocks increasing by 1.5 million barrels while Cushing stock increased by 1.8 million barrels. On the week gasoline stocks increased by about 4.1 million barrels while distillate fuel stocks decreased by about 0.6 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 modest inventory build, 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 32.1 million barrels while the overhang versus the five year average for the same week will come in around 41 million barrels.

I am expecting a modest build in crude oil stocks in Cushing, Ok as the Seaway pipeline has been shut for most of the report period with the restart not coming until last Friday. 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 $17.75/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 2 million barrels which would result in the gasoline year over year surplus coming in around 7.6 million barrels while the surplus versus the five year average for the same week will come in around 13.6 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 15.8 million barrels below last year while the deficit versus the five year average will come in around 17.4 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 moved above their respective channel breakout levels. 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 neutral with an eye toward the upside if we get further follow through buying and supportive weather forecasts. I now anticipate that the market is less likely to 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 mixed heading into the US trading session as shown in the following table.

Best Regards,

Dominick A. Chirichella

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