Quote of the Day
Nothing is as frustrating as arguing with someone who knows what he’s talking about.
After attempting to breakout through the upper range resistance level, all of the commodities in the oil complex failed and have been in retreat mode since early yesterday and into this morning so far. Crude oil has made a strong recovery since bottoming in the middle of April when WTI was trading in the mid- $80’s and Brent was down to about $97/bbl. As I have been discussing for the last two weeks the overriding fundamentals remain biased to the bearish side as global oil demand continues to show all of the signs that it is likely to slow in sync with the slowing global economy. The technicals have painted a different picture as a relatively strong short covering rally has occurred over the last several weeks.
Overnight the latest data point from the main oil demand growth engine of the world…China… was released and supports the prevailing view on oil demand. The China Federation of Logistics and Purchasing reported that its energy sensitive manufacturing PMI declined to 50.6 in April from 50.9 in March. Although the level is still above the so called expansion threshold of 50 this index has been gradually slowing suggesting that future economic growth may also follow and slow further.
The Agency said that export orders, prices and other indicators have also been slowing steadily. With the majority of the projected oil demand growth expected to come from China in 2013 the current data suggests that the projections for oil demand growth are likely to be ratcheted down again when the three oil forecasting agencies (IEA, EIA and OPEC) release their next round of forecasts beginning next week.
Staying with the macroeconomics today the ever important employment data cycle starts in the U.S. culminating with the release of the nonfarm payroll data. The industry is expecting a net gain of about 155,000 new jobs after last month’s disappointing 88,000 job gain. The headline unemployment rate is expected to remain steady at 7.6%... unless of course there is another notch down in the participation rate or simply more people giving up looking for jobs and thus making the employment rate look lower than it actually is.
Over the last month or so the vast majority of the macroeconomic data that has been released suggests that the global economy is continuing to slow including the high flyers like China and other emerging market countries. The developed world economies are truly mixed with most of Europe in recession while the U.S. economy is growing, but at a below normal rate for this phase of the recovery period. With oil supply remaining robust and with demand growth faltering there is likely to be a continuation of an imbalance biased to the supply side for the short to medium term and thus a cap on oil prices going forward.
The June Brent/WTI spread has continued to narrow and came within $0.15/bbl on an intraday basis on Tuesday of testing the next major technical support level of $8.25/bbl. Cushing inventories may be transitioning with the API reporting a 1.4 million barrel decline in Cushing stocks along with an almost 2 million barrels draw in PADD 2 crude oil inventories. The Cushing data point has been mostly in sync between the API and EIA data over the last month or so and as such it is likely we may see a similar draw in Cushing stocks when the EIA data is released later this morning.
The spread remains in a downtrend with resistance back around the $10/bbl level. With robust production coming from the North Sea and no major interruptions in global oil supplies the Brent/WTI spread is being pressured negatively from the Brent side of the equation. This coupled with what is now looking like Cushing stocks possibly resuming the destocking pattern they were in prior to the Pegasus pipeline shut down suggests that lower levels may be possible in the short to medium term. I remain bearish the spread with $8.25/bbl support and $10/bbl resistance.
Global equity markets have continued to add value this week as shown in the EMI Global Equity Index table below. The Index is now higher by 1.7% for the week pushing the year to date gain to 1.2%. Only two bourses remain in negative territory for 2013 with Japan still maintaining the top spot in the Index with the U.S. Dow a distant second place. Brazil continues to hold the bottom spot in the Index. Overall global equities have been a positive price driver for the oil complex but over the last two sessions the bearish fundamental outlook for oil has overridden the support coming from equity markets.
Tuesday's API report was bearish for crude oil and supportive for refined product markets. Once again there was a major surprise with the API data with a much larger than expected build in crude oil stocks and larger than expected draws in refined products. Total crude oil stocks increased by 5.2 million barrels versus an expectation for a modest build of about 1.0 million barrels as crude oil imports increased while refinery run rates decreased by 0.3%. The API reported a surprise draw in distillate fuel inventories versus an expectation for a small build. Gasoline stocks declined much more than expected.
The entire oil complex is still in negative territory on disappointing data out of China overnight 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 2 million barrels while Cushing stock decreased by 1.39 million barrels. On the week gasoline stocks decreased by about 2.7 million barrels while distillate fuel stocks decreased by about 1.1 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 small build in distillate fuel... as some areas of the U.S. returned to spring like temperatures during the report period... and a draw in gasoline stocks even as refinery runs are expected to show a small gain.
I am expecting crude oil stocks to increase by about 1.0 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 13.7 million barrels while the overhang versus the five year average for the same week will come in around 31.3 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok even though the Pegasus pipeline has remained shut down for all of the report period. This will be bearish for the Brent/WTI spread and should serve as a catalyst to continue the current narrowing trend of the spread in the short term.
Even with refinery runs expected to increase by 0.3 percent I am expecting a small 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 7.6 million barrels while the surplus versus the five year average for the same week will come in around 4.8 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 8.2 million barrels below last year while the deficit versus the five year average will come in around 18.7 million barrels.
The below 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 neutral with a cautiously bullish bias as the short term price recovery in oil over the last week or so could extend further. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range resistance levels suggesting further upside potential in the short term.
I am maintaining my view at neutral for Nat Gas and maintaining my bias at neutral even though the spot Nymex contract is continuing to trade above the $4.16/mmbtu level. The market failed for the fourth time on Monday to breach the $4.40/mmbtu resistance and then turned to the downside since failing. I remain neutral until the next resistance level is breaches and the market settles above the $.40/mmbtu level.
Markets are mostly lower ahead of the U.S. trading session as shown in the following table.
Dominick A. Chirichella