Quote of the Day
If everything seems under control, you’re just not going fast enough.
Is the worst of the risk asset selling over or was Tuesday’s trading activity just a bit of short covering rally in a broader downtrend that is just getting underway? Tuesday’s trading session saw a partial recovery in equity values in selective market like the U.S. with Europe closing lower and Asia getting ready to start a new session. As is normally the case, the market sentiment tends to quickly react to changes in the status of the global economy as has been the case for the last several days.
As far as the oil complex is concerned the cloud of uncertainty began to emerge last week when the IEA, EIA and OPEC all lowered their projections for global oil demand growth based on a view that the global economic recovery may be starting to slow. The magnitude of the reductions were not very large, but it put the market on notice that oil demand growth may be a larger issue in 2013 than supply.
The second shot over the bow hit Sunday night (U.S. time) when the China’s first quarter GDP came in 0.2% below the fourth quarter level and 0.3% below the market expectations. China is the main economic and oil demand growth engine of the world and if its economy is entering into a slowing pattern the cloud of uncertainty will grow very quickly and have negative implications on other economies around the globe as well as on the broad based commodity markets as China is one of the largest consumers of commodities including oil.
The latest warning hit on Tuesday morning when the IMF released their latest update for the global economy for 2013 and 2014. The global economy is expected to continue mending gradually, says the International Monetary Fund (IMF), whose latest forecast of economic growth projects 3.3% growth in 2013, and 4% in 2014. But with old dangers remaining and new risks emerging, policymakers cannot afford to relax their efforts. The report forecasts real global GDP growth of 3.3% on an annual average basis in 2013, about the same as the 3.2% growth seen in 2012, and the IMF expects growth to rise to 4% in 2014. As shown in the following table the IMF has lowered its projections for economic growth for 2013 compared to its January forecast for just about country/region shown in the table including China.
Although the IMF is still expecting global GDP to be positive, they are now expecting the global economy to perform at about the same level as it did in 2012. The global economy is now not expected to expand in 2013 versus 2012 and thus oil demand growth is going to have limited upside. Overall the IMF report was another bearish shot and one that again is supporting the view that oil and most commodity demand is going to expand very slowly and likely to not grow as much as had originally been forecast at the beginning of the year.
So, yes, we had a recovery in some risk asset markets on Tuesday but most of the commodities in the oil complex continued to decline (exception WTI showed a small gain) with Brent trading below the $100/bbl level on an intraday basis for the second day in a row. At the moment the oil complex is in a technical downtrend with the fundamentals being driven by a deteriorating demand projection in a robust supply environment. For now there is no immediate reason… other than short covering… to suggest that oil prices are ready for strong move to the upside.
Global equity markets in some areas of the world recovered some of Monday’s loses as shown in the EMI Global Equity Index table below. The Index is still down by about 1.6% for the week but the Index is off of it worst level for this week (so far). The EMI Index remains in negative territory for 2013 by 2.2% reflecting the less than robust view of the evolving global economy. Four of the ten bourses in the Index remain in negative territory with Brazil continuing to underperform versus the rest of the bourses while Japan remains on top of the leader board… where it has been throughout the declining trend in the yen.
Tuesday's API report was mostly bearish across the board this week. For the second week in a row there was as surprisingly much larger than expected build in crude oil stocks along with surprise builds in both gasoline and distillate fuel inventories. Total crude oil stocks increased by 6.7 million barrels versus an expectation for a smaller build of about 1.5 million barrels even as crude oil imports decreased strongly while refinery run rates decreased by 0.5%. The API reported a modest build in distillate fuel inventories and in gasoline stocks.
The API report was biased to the bearish side. The entire oil complex is in negative territory since the report and heading into the EIA oil inventory report to be released at 10:30 AM EST on Wednesday. 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 declined by around 1.3 million barrels while Cushing stock increased by 1.1 million barrels. On the week gasoline stocks increased by about 0.3 million barrels while distillate fuel stocks increased by about 1.3 million barrels.
My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather returned to non- spring line temperatures over the east coast during the report period... and a draw in gasoline stocks as refinery runs still remain at below normal levels during the maintenance season.
I am expecting crude oil stocks to increase by about 1.5 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 21.4 million barrels while the overhang versus the five year average for the same week will come in around 37.9 million barrels.
I am expecting a strong build in crude oil stocks in Cushing, Ok and in PADD 2 as the Pegasus pipeline has remained shut down for all of the report period. This will be bullish for the Brent/WTI spread and should serve as a catalyst to keep the short covering rally going.
With refinery runs expected to increase by 0.2 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year surplus of around 7.9 million barrels while the surplus versus the five year average for the same week will come in around 6.5 million barrels.
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 16.7 million barrels below last year while the deficit versus the five year average will come in around 22.2 million barrels.
I am maintaining my view of the entire complex at a cautiously bearish bias as inventories are starting to build and moving the complex back into a supply driven mode rather than a demand led market. In addition demand growth is starting to turn to the downside. Brent has now breached its range support level again with WTI and refined products not faring any better. The complex is now suggesting that the next move is likely to be a continuation to the downside.
I am maintaining my view at neutral for Nat Gas with a neutral bias as the spot Nymex contract is continuing to hover and trade either side of the $4.16/mmbtu level for the last several days.
Markets are mixed ahead of the Asian trading session as shown in the following table.
Dominick A. Chirichella