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Oil prices continue to slowly inch higher as the market sentiment seems to be moving more and more toward a bullish bias. The spot Nymex WTI futures contract has been hugging the upper end of the upward trending trading channel since the middle of January. Although the nearby fundamentals are still biased to the bearish side there have been a plethora of items that have helped to keep the markets focus more on the forward fundamentals, which at the moment look more constructive than the nearby supply and demand balances.
From a technical perspective the spot WTI contract has now cleared its last resistance hurdle of $95/bbl and moved into a new... higher trading range of $95/bbl to $100/bbl. On a longer-term view, the spot WTI contract has been in an uptrend since bottoming out at around $85/bbl back in the first half of December of 2012. The spot Brent contract has not moved to the upside with the same conviction as the WTI contract as more market participants shed some of their long Brent/WTI spreads. Since mid-December the Spot WTI contract has increased by almost $12/bbl while the spot Brent contract has gained about $5/bbl. That is a significant adjustment in the spot Brent/WTI spread.
The March Brent/WTI spread is now trading around the $15.70/bbl level or the lowest level since the second half of September. Although the crude oil inventory situation in both Cushing, Ok and PADD2 are still sitting at all-time highs the changing logistics has the market convinced that the draining of this region of the U.S. of its surplus crude oil will begin with earnest over the next month or so. The expanded Seaway pipeline is already pumping near its new maximum capacity of about 400,000 bpd and along with rail and barge movements we should begin to see an impact at least by the second quarter at the latest. With more and more oil from the prolific Bakken field moving all the way to the east coast of the U.S., east Canadian crude oil has now actually moved to northwest Europe recently.
Eastern Canadian crude almost always goes to the U.S. northeast refineries. In a rare situation the arb window to move about 2 million barrels of East Canadian crude oil to northwest Europe opened. It is too early to say that this arb movement will now be a sustained changed in the logistics, but it certainly is worthy of putting on the radar as something that could have an impact on the Brent/WTI spread if it continues.
If the movement becomes more regular it serves to move more crude out of the surplus Midwest U.S. to the east coast to displace east Canadian crude. That is bullish for the WTI side of the equation while the movement of east Canadian to northwest Europe is bearish for the Brent side of the spread. In essence it is like virtually exporting U.S. crude oil (which is not permitted). So yes something to watch on the changing physical relationships of an international crude oil market that has been dynamically changing for the last few years. Barring a major geopolitical event impacting the flow of oil to Europe, I would say that the Brent/WTI spread has likely peaked for the year and will continue in a slowly evolving downtrend throughout the year. I am expecting the spread to be trading in single digits by the third quarter of this year.
Global equity market gave back some of last week's robust gains over the last 24 hours as shown in the EMI Global Equity table below. The Index lost almost 0.3% for the week resulting in the year to date gain narrowing to 2.4%. The big mover over the last 24 hours was the Japanese equity market, which was somewhat disappointed over the Bank of Japan's kicking the can down the road before starting its open ended easing program. The Japanese bourse has also been the main mover for most of this year but after last night's downward move it no longer holds the top spot in the Index. The London FTSE has now moved in to take control of the top spot with the U.S. Dow now in second place. Global equities have been a positive for the oil complex as well as the broader commodity markets throughout 2013 so far.
On the event front, the U.S. House of Representatives will vote today on raising the debt ceiling for a three month period of time to allow for the U.S. Senate to possibly pass its first budget in more than four years. As we saw at the end of 2012 we are back into the political brinkmanship mode with the short-term outcome likely to impact risk asset market volatility until the politicians finally agree on a lasting deal.
The weekly oil inventory cycle will begin one day late because of the holiday this week in the U.S. The weekly oil inventory cycle will begin with the release of the API inventory report on Wednesday afternoon and with the more widely followed EIA oil inventory report being released Thursday morning at 11 AM EST. With geopolitics still 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 above table. I am expecting the U.S. refining sector to increase marginally. I am expecting a modest build in crude oil inventories after last week's modest inventory build, a build in gasoline and a small draw distillate fuel stocks as the weather was more winter like over the east coast during the report period. I am expecting crude oil stocks to increase by about 1.8 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 27.3 million barrels while the overhang versus the five year average for the same week will come in around 36.5 million barrels.
I am expecting a small draw in crude oil stocks in Cushing, Ok as the Seaway pipeline has been has been running near its expanded capacity for most of the report period. This will be bearish for the Brent/WTI spread in the short term as the spread is currently trading at its lowest level since late September. The narrowing of the spread should gain a bit more momentum over the next month or so as discussed above.
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 8.9 million barrels while the surplus vs. the five-year average for the same week will come in around 11 million barrels. If the actual gasoline build is in sync with my projection gasoline stocks will have built by about 36 million barrels since November.
Distillate fuel is projected to decrease by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 13.6 million barrels below last year while the deficit vs. the five-year average will come in around 16.5 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 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 maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a further move to the upside now that the spot WTI contract has breached its upper resistance level.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather 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 at the moment.
Markets are mostly higher heading into the U.S. trading session as shown in the following table.
Dominick A. Chirichella