Quote of the Day
The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will.
Firming equity markets in the U.S. were enough to bolster oil prices after their negative start on Tuesday reversing the selling from the decline in China’s PMI data. The oil complex has been under pressure for the last several weeks as the market focuses on a weakening oil demand scenario on the back of a slowing global economy. Most of the macroeconomic data hitting the media airwaves over the last several weeks has been suggesting that economies in both the developed and emerging market world may be heading for a period of slowing… even the main economic and oil demand growth engine of the world China.
That said several equity markets around the world have been continuing on an upward path suggesting that those particular regions of the world may not be slowing but in fact actually still expanding. When I look at the individual bourses in the EMI Global Equity Index table (shown below) the equity markets that are in positive territory for the year are all in developed world countries while the emerging market countries listed in the Index are showing year to date losses. In addition most of the gainers are in countries that have very accommodative monetary policies including aggressive quantitative easing programs like Japan and the U.S. (the two largest equity gainers in the Index).
Thus the gains in equities in the aforementioned countries suggest to me that it is the accommodative and aggressive easy money policies that are driving inventors into equity risk markets rather than a view that equities are rising on the back of a strongly growing economy. For example so far the current corporate earnings season has been highlighting the weakness in Europe for earnings and revenue misses. Of the 150 or so of the S&P 500 companies that have reported earnings, so far most companies are missing revenue expectations suggesting that the forward look on where the economy is going is toward the slowing front. Thus the upward movement in selective equity markets seems more driven by QE and low interest rates rather than robust economic growth.
Interestingly oil and equities are relatively correlated except over the last month or so we have seen oil prices not following the strong moves higher in the equity markets that are benefiting from QE type policies. In fact we have seen crude oil prices decline a tad over $10/bbl since the beginning of April mostly being driven by the perception or view that the global economy is slowing and thus oil demand growth may slow even further versus current projected levels. At the moment there is a divergence between the direction of oil prices and selective equity markets.
Tuesday's API report was slightly supportive for crude oil and gasoline and neutral for distillate fuel. For the first time in three weeks there was no major surprise or miss for crude oil but there was a surprise draw in gasoline inventories. Total crude oil stocks decreased by 0.8 million barrels versus an expectation for a modest build of about 1.5 million barrels even as crude oil imports decreased while refinery run rates decreased by 1.5 percent. The API reported a build in distillate fuel inventories that was within the expectations.
The entire oil complex is still in positive territory after yesterday’s recovery in prices 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 built by around 0.8 million barrels while Cushing stock decreased by 0.038 million barrels. On the week gasoline stocks decreased by about 2.7 million barrels while distillate fuel stocks increased by about 0.7 million barrels.
My projections for this week’s inventory report are summarized in the above table. I am expecting a modest build in crude oil inventories, a small build in distillate fuel... as the weather returned to spring like temperatures over the east coast during the report period... and a build in gasoline stocks as refinery runs are expected to also show a gain.
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 16.1 million barrels while the overhang versus the five year average for the same week will come in around 34.6 million barrels.
I am expecting a small draw in crude oil stocks in Cushing, Ok even though the Pegasus pipeline has remained shut down for all of the report period. Last week the Keystone pipeline experienced an unscheduled interruption in the flow of oil out of Canada which subsequently resulted in reduced flow into Cushing. Although the line was back to full operation by mid last week the impact of Keystone likely resulted in a modest decline in Cushing inventories during the report period. This will be bullish for the Brent/WTI spread and should serve as a catalyst to keep a cap on any further widening of the spread in the short term.
With refinery runs expected to increase by 0.4 percent I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 0.3 million barrels which would result in the gasoline year over year surplus of around 10.3 million barrels while the surplus versus the five year average for the same week will come in around 7.1 million barrels.
Distillate fuel is projected to increase 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 10.2 million barrels below last year while the deficit versus the five year average will come in around 16.3 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 some large differences compared to last year’s changes. 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 most everything in the complex.
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 and maintaining my bias back at neutral even though the spot Nymex contract is continuing to trade above the $4.16/mmbtu level. The market failed for the third day in a row to breach the $4.40/mmbtu resistance and then turned to the downside since failing yesterday. That is a bearish signal and one that suggests that the market may now test the lower $4.16/mmbtu support level.
Markets are mostly higher at the start of the European trading session as shown in the following table.
Dominick A. Chirichella