Quote of the Day.
The imagination is how things get done. You have to cultivate creativity.
Russell Simmons
The main economic event of the day will be the outcome of the U.S. Fed FOMC meeting with the focus mostly on the statement as most in the market expects a rollover of existing accommodative policies. The announcement will be released at 2:15 PM EST as there is no press conference by the Chairman this month. There is a growing view around the markets and by many economists that the Fed could begin to look for an exit point for its very accommodative monetary policy sooner than originally anticipated. That said as of the last meeting the Fed has clearly tied their easing policies to the unemployment rate suggesting that they would not change until the unemployment rate drops to below 6.5%. It is currently at 7.8% but the economy seems to be picking up its recovery pace a tad. Of interest Fed Chairman Bernanke does not expect the unemployment rate to drop below 6.5% until 2015.
I do not expect the Fed to signal any changes but they are likely to make a comment that the U.S. economic recovery is improving. Some in the market may interpret that as a sign that tightening could come earlier than expected. We will have to see how the market reacts this afternoon especially since the equity markets are trading near multi year highs and remain in an overbought mode and susceptible to a round of profit taking selling.
The Fed meeting is not the only economic data point to hit the airwaves today. In Europe EU economic confidence data has already been released and it came in better than the previous month as well as higher than the expectations. EU business, consumer & economic confidence and industrial sentiment all improved in January versus December's data points. Another sign that the sluggish EU economy may be in the early stages of forming a turning point. The euro is also trading above the 1.35 level or the highest level since the end of 2011 a sign that the debt crisis may finally be in the background in Europe.
In the U.S. the fourth quarter GDP will be released this morning with the expectation at 1% versus 3.1% for the third quarter. The fourth quarter growth pattern in the U.S. was impacted by the devastating Hurricane that hit a major portion of the east coast and may not be reflective of the true growth rate of the U.S. going forward. In addition the employment data cycle also begins today with the release of the ADP private sector report which is expected to show about 175,000 new private sector jobs were created in January.
Oil prices have been slowly continuing to evolve in the uptrend that has been in play since bottoming in the middle of December. The spot Nymex WTI contract has breached the upward trending channel resistance level and from a technical perspective now has a clear path to the next resistance level of around the $100/bbl area. The spot Brent contract has also cleared its last technical resistance area of $114/bbl setting the stage for a test of the next resistance level of around $118/bbl. There is some minor resistance around the $116/bbl level that could serve to slow the upward advance... assuming the upward advance continues.
There has been no new news on the status of the Seaway pipeline bottlenecks and as such the March Brent/WTI spread is still trading above the level it was trading at prior to the announcement by Seaway last Wednesday. The spread is currently trading around the $17/bbl resistance level and below the high of this move of about $17.60/bbl hit last Wednesday. In the short term the next move of this spread is likely to be mostly impacted by what happens with Seaway followed by what the inventory outcome is for both PADD 2 and Cushing in this morning's EIA inventory report.
Although there have been no major geopolitical issues that have had a significant impact on oil flow out of the MENA region the market is slowly become more aware and nervous with the issues that have occurred over the last few weeks as well as what is evolving of late from the region. The Algerian hostage situation was a wakeup call that this country is not immune to the issues that have plagued many other countries in the area. Also Libya is far from stable with strikes and sporadic fighting curtailing crude oil production levels and postponing some new drilling ventures by some of the IOC until later in the year on the premise that it will be more stable. Egypt is also flaring up once again as more of the population seems to be dismayed by the current leadership resulting in rioting and unrest in many cities in Egypt.
There are other hot spots starting to break through the surface resulting in the geopolitical risk premium starting to slowly creep back into the price of oil. At the moment I would categorize geopolitics as the floor in oil prices at a minimum with an additional premium starting to emerge. Geopolitical risk is currently coming back into the forefront in the mindset of most to the oil market participants.
Global equity values have recovered most of the losses from the first part of the week and are now almost unchanged for the week as shown in the EMI Global Equity table below. The Index is just 0.07% lower for the week with the year to date gain sitting at the 2.6% level. Brazil remains the only bourse in the Index that is still in negative territory for the year with London and the US holding the top two spots in the Index (in that order).
As I have been discussing since last week that many of the global equity bourses are in overbought territory and susceptible to a downside correction at any time. For example the London FTSE is up 7% for the month of January while the US Dow is higher by 6.5%. These are not sustainable monthly gains that are going to continue to be repeated without interruption. There is a plethora of market moving data yet to hit the media airwaves this week any of which could act as a catalyst to send the market into a round of profit taking selling. There will be a move to the downside at some point and the oil complex will also be impacted. Protect your profits from the current run higher.
Yesterday's API report was mixed with a larger than expected build in crude oil, a surprise build in gasoline and a larger than expected draw in distillate fuel. Total crude oil stocks increased by 4.2 million barrels versus an expectation for a more modest build. Gasoline showed a surprise build in inventory while distillate fuel stocks decreased versus an expectation for a smaller draw. The API reported a 4.2 million barrel build in crude oil stocks versus an industry expectation for a modest build of around 2.5 million barrels as crude oil imports increased but offset by a modest increase in refinery run rates by 0.7%. The API reported a modest draw in distillate and a build in gasoline stocks.
The API report is neutral to bearish as total stocks built even with the draw in distillate fuel. The oil market is mostly higher heading into the US trading session and ahead of the EIA oil inventory report at 11 AM today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. I view the current gains in oil prices to be more related to the economic data and not the API report. The API reported PADD 2 stocks increasing by 0.8 million barrels while Cushing stock decreased by just 15,000 barrels. On the week gasoline stocks increased by about 2.4 million barrels while distillate fuel stocks decreased by about 1.8 million barrels.
My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally. I am expecting a modest build in crude oil inventories after last week's modest inventory build, a small draw in gasoline and distillate fuel stocks as the weather was more winter like over the east coast during the report period and as refinery runs continue to decline ahead of U.S. maintenance season. I am expecting crude oil stocks to increase by about 2.5 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 26.7 million barrels while the overhang versus the five year average for the same week will come in around 37.5 million barrels.
I am expecting a build in crude oil stocks in Cushing, Ok as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading above the level it was trading at just prior to last week's Seaway pipeline announcement.
With refinery runs expected to decrease by 0.2% I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.1 million barrels which would result in the gasoline year over year surplus coming in around 3 million barrels while the surplus versus the five year average for the same week will come in around 5.2 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 million barrels below last year while the deficit versus the five year average will come in around 15.2 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 continued move to the upside now that the spot WTI contract has breached its upper resistance level once again. That said I am raising the caution flag that an equity market correction will impact oil prices in much the same way... round of profit taking selling.
I am moving my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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 in the US trading session as shown in the following table.
Best Regards,
Dominick A. Chirichella
