Quote of the Day
The most important thing about goals is having one.
Geoffrey F. Abert
Even as equity markets in the U.S. hit new all-time high levels trading, activity in the oil complex was muted with limited price gains that were almost entirely driven by a light round of short covering. The relatively balanced global fundamental situation has been keeping oil prices under control as the market has been in a short term downward trading channel since breaking through key technical support levels in the middle of February. Even the growing list of geopolitical events that would have normally sent oil prices to higher levels has been mostly ignored by market participants.
Both the spot WTI and Brent contracts are in a slowly evolving technical bottoming pattern with both contracts still below key resistance levels, However, both have held above support levels for the last three or four trading sessions. On the other hand heating oil actually rose strongly and is now trading above its resistance level indicating that this commodity has put in a short term bottom and is likely to move higher. RBOB gasoline has also been going through a bottoming pattern and is currently trading around its resistance level. Overall the oil complex may have put in the lows for the current downward move.
On the geopolitical front there has been a lot of rhetoric and tough talk coming from the U.S. and Israel regarding Iran's nuclear program. Israel has said Iran has crossed the line in its program and is taking advantage of the talks with the west to continue to progress closer to its goal of nuclear weapons. Both Secretary Kerry and Vice President Biden clearly stated over the last several days that the military option is on the table and the U.S. would continue to do what it had to do to prevent a nuclear Iran. Even former Secretary of State Kissinger said a nuclear crisis around Iran is getting closer. The geopolitical risk to the oil producing regions of the Middle East is moving back into the foreground and if the rhetoric and tough talk continues market participants are once again going to start to add to the risk premium in the price of oil.
Yesterday Venezuelan President Hugo Chavez succumbed to his two year fight with cancer. Venezuela is now on the radar as the transition to a new election and thus a new leader could create instability and uncertainty over the next several months. The current vice president is the current front runner with the opposition party likely to make a strong run in the upcoming election. The military and police have been put on alert. The government leaders continue to view external forces as a potential cause of instability and yesterday they expelled two U.S. diplomats accusing them of spying.
Although Venezuela is not as large an exporter of oil as it was back in 2002 during the attempted coup, it is still a factor and any interruption in oil supply will result in a short term upward move in oil prices. We need to watch what evolves over the next month or so.
The macroeconomic data out of both China and Europe were mostly positive yesterday and pushed global equity prices higher with both Europe and the U.S. hitting all-time high levels. Global equities have been a supportive price driver for oil prices but as I mentioned above oil has not reacted very strongly to the equity rallies over the last several days.
In contrast to yesterday's positive data out of Europe today's release of fourth quarter EU GDP data showed Europe slipped deeper into recession compared to just the third quarter. GDP declined by 0.6% in Q4 and 0.9% for the year. Germany and France also saw a larger contraction in Q4 with Germany's construction PMI coming in at 43.8 for February compared to 47.7 in January for the eleventh month of declines in a row.
It is still difficult to get too excited about any major economic recovery in the EU just yet. Tomorrow the ECB meets with most market participants expecting a status quo outcome keeping short term interest rates at current levels. With the EU continuing to contract I would expect the ECB to lower short term rates sometime soon if not at this week's meeting. Even though European equities are now at 4-1/2 year highs the economy is not growing and thus oil demand is not growing either in Europe, thus contributing to the muted reaction we have seen in oil prices during the most recent run-up in equity values.
Today the ever important monthly jobs data cycles gets underway in the U.S. with the release of the ADP private sector jobs report followed by the weekly initial jobless claims tomorrow and the main event on Friday... nonfarm payroll data and headline unemployment number. The market is expecting a modest increase in jobs on Friday of about 170,000 new jobs with the unemployment rate holding steady at 7.9%.
The U.S. employment situation has taken on an elevated level of importance by the market as the U.S. Fed has linked much it its monetary policy — including their massive money printing operations — to the state of the jobs market. Any sign that the jobs situation is improving at a faster pace than the market is currently forecasting would likely be interpreted by market participants that the Fed might potentially end its quantitative easing program sooner than originally expected. If so the U.S. dollar would rise and oil and most other commodity prices would likely decline further from current levels.
Global equity markets have continued to rebound this week as shown in the EMI Global Equity Index table below. Only Brazil continues to struggle as it declined yesterday while every other bourse in the Index added value. The Index is still slightly lower for the week by 0.1% with the year to date loss currently at 0.2%. Japan's equity market is continuing to soar with its year to date gain now at 14.2% as a weaker yen adds support to this export oriented economy. Australia is also now showing double digit gains for the year as its economy continues to expand. Overnight the latest Q4 GDP was released for Australia showing a gain of 0.6% even as its main export customer China has experienced a slower growth pattern than several years ago.
Yesterday's API report showed a much larger than expected build in crude oil, a larger than expected draw in distillate fuel and decline in gasoline stocks, which was mostly within the market expectations. Total crude oil stocks increased by 5.6 million barrels versus an expectation for a smaller build. Gasoline showed a draw in inventory as did distillate fuel stocks. The API reported a 5.6 million barrel build in crude oil stocks versus an industry expectation for a smaller build of around 1 million barrels as crude oil imports increased while refinery run rates decreased strongly by 2.1%. The API reported a modest draw in distillate and in gasoline stocks.
The API report was mostly neutral wit support for heating oil. The oil market is mostly mixed 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. The API reported PADD 2 stocks were unchanged while Cushing stock increased by 0.3 million barrels. On the week gasoline stocks decreased by about 0.9 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 following 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 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 0.9 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 32.7 million barrels while the overhang versus the five year average for the same week will come in around 38.3 million barrels.
I am expecting a draw in crude oil stocks in Cushing, Ok and in PADD 2 even 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. However, as discussed above the shutdown of the Brent pipeline will likely offset any decline in Cushing stocks (unless of course if the decline is significant). Currently the spread is still trading well above the level it was trading at just prior to the Seaway pipeline announcement.
With refinery runs expected to decrease by 0.2% 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 1.8 million barrels while the surplus versus the five year average for the same week will narrow to around 0.5 million barrels.
Distillate fuel is projected to decrease by 1.0 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 16.3 million barrels below last year while the deficit versus the five year average will come in around 17.2 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 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 upgrading my view of the entire complex to neutral as the oil complex appears to be putting in a short term bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.
I am adjusting my natural gas view to cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level. 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 mixed ahead of the U.S. trading session as shown in the following table.
Dominick A. Chirichella