Quote of the Day.
There is no respect for others without humility in one's self.
Henri Frederic Amiel
We had a modest recovery or short covering rally after the market liked what they heard from Bernanke during his testimony to Congress on Tuesday morning. He did not surprise the market and he certainly indicated that quantitative easing was not going to end anytime soon. He cited the difficult labor market and low inflation risk. He also said that the benefits of aggressive monetary policy far outweigh the risks. These and many more favorable comments on the Fed's easy money policy were enough to turn the market's attention away from the political dysfunction in Italy and to offset the hawkish comments from the FOMC meeting minutes that came out last week. The market moved into a modest short covering rally after the Bernanke comments with U.S. equities recovering about half of the losses from Monday's sell-off.
Most risk asset markets are still lower on the week but at the moment market participants seem to be moving from a panic mode as they continue to digest the outcome of the Italian elections and the implications it may or may not have on the broader EU & ECB policies as well as the upcoming U.S. sequester cuts due to hit on March 1 (if no agreement is reached). All of the risk asset markets including oil remain in an event driven pattern which will be in play at least through this week. All of the normal macroeconomic data is playing a secondary role as the markets move in sync on each new 30 second news snippets regarding Italy, Bernanke, and the sequester.
Another event that is primarily an oil event... the Iran & P5+1 nuclear talks in Kazakhstan ended pretty much as I predicted it would. No significant progress was made even as both sides had conciliatory comments on the meeting. Iran's Foreign Minister says "very confident" nuclear deal can be found with P5+1. A technical meeting is scheduled for March 18 in Istanbul and political discussion will resume on April 5 with Iran and P5+1 back in Kazakhstan. According to an article in Reuters the west did not offer to suspend oil or financial sanctions during the talks with Iran (according to a U.S. official). They offered to lift some sanctions if Iran scales back its nuclear activity.
We have seen this outcome in prior meetings with both sides saying progress has been made and another round of meetings scheduled. History still suggests that a major deal is not likely to occur anytime soon. As such for the moment I would categorize the outcome of the meeting as neutral to slightly bullish for the oil complex as the market is not likely to see any reason to sell off of the risk premium as nothing has been solved at this stage of the game.
Still no progress on the U.S. sequester talks. I still believe there is less than a 50% chance that a deal gets done by Friday's deadline and if it does it will not be to the very last minute. The President and his party continue to present a fear approach through the media while the Republicans continue to hold to their position. As I have discussed in previous emails I think the whole sequester thing is a bit of a Y2K moment and even if the cuts do begin to occur on March 1 I am not convinced that there will be a major impact on government services nor on the economy. In either case it will be a market moving event with the impact on risk asset markets becoming more pronounced as we move toward the Friday deadline.
Global equities recovered some of the losses from Monday's sell-off as shown in the EMI Global Equity Index table below. With the exception of Japan all of the other bourses in the Index added values over the last twenty four hours. The Index is still lower on the week by about 0.3% with the year to date loss narrowing to 1%. Australia has joined Japan at the top of the leader board while four bourses are still in negative territory for the year to date... Brazil, Paris, Germany and Hong Kong. Global equities remain a negative price support for the oil complex and the broader commodity complex.
Yesterday's API report showed a smaller than expected build in crude oil, a surprise and declines in both gasoline distillate fuel inventories that were within the expectations. Total crude oil stocks increased by 0.9 million barrels versus an expectation for a larger build. Gasoline showed a draw in inventory as did distillate fuel stocks both within the forecasts. The API reported a 0.9 million barrel build in crude oil stocks versus an industry expectation for a larger build of around 2.5 million barrels as crude oil imports increased marginally while refinery run rates increased by 0.7%. The API reported a modest draw in distillate and in gasoline stocks.
The API report was slightly bullish across the board. The oil market is mostly higher heading into the U.S. 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. The API reported PADD 2 stocks decreased by 0.5 million barrels while Cushing stock decreased by 0.2 million barrels. On the week gasoline stocks decreased by about 1.4 million barrels while distillate fuel stocks decreased by about 1.7 million barrels.
My projections for this week’s inventory report are summarized in the above table. I am expecting the U.S. refining sector to decrease as more refineries move into maintenance mode. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was very winter like over the east coast... and a draw in gasoline stocks during the report period as refinery runs continue to decline ahead of US maintenance season. I am expecting crude oil stocks to increase by about 2.3 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 33.8 million barrels while the overhang versus the five year average for the same week will come in around 40.3 million barrels.
I am expecting a build in crude oil stocks in Cushing, Ok and in PADD 2 as the Seaway pipeline has been has been running at constrained levels for most of the report period and refinery runs are starting to throttle back for maintenance in the region. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading well above the level it was trading at just prior to the Seaway pipeline announcement.
With refinery runs expected to decrease by 0.3% I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.8 million barrels which would result in the gasoline year over year deficit coming in around 0.3 million barrels while the surplus versus the five year average for the same week will narrow to around 0.7 million barrels.
Distillate fuel is projected to decrease 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 19.3 million barrels below last year while the deficit versus the five year average will come in around 21 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 moving my view of the entire complex to cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... another round of profit taking selling as we experienced yesterday.
I am maintaining my Nat Gas view and bias at neutral as the weather forecasts and nearby temperatures are supportive. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.
Markets are higher ahead of the US trading session as shown in the following table.
Dominick A. Chirichella