Quote of the Day
Do a little more each day than you think you can.
The oil complex has been drifting lower since the middle of yesterday’s trading session as supply gains along with faltering oil demand continue to weigh on the market. The API reported a build in both crude oil and distillate fuel stocks setting the stage for similar builds in the more widely followed EIA inventory report due out at 10:30 am this morning. As I have been discussing in the newsletter for weeks, oil fundamentals remain biased to the bearish side as supply is projected to continue to outstrip global demand in the second quarter (see summary of latest EIA STEO report below) resulting in global inventories moving into a building pattern. With most of the macroeconomic indicators still projecting that the global economy is sluggish at best there are no signs that oil consumption is going to enter into a growth spurt anytime soon. Rather oil demand is projected to be lower going forward as compared to the forecasts that were issued just last month. Simply put there is a shortage of oil demand and a growing oversupply of oil coming from non-OPEC countries like the U.S.
The June Brent/WTI spread went through a one day correction to the upside as I suggested but as it moved into the resistance area of $10 to $10.50/bbl it failed to breach through this level and actually reversed to the downside strongly… a bearish technical signal. In the last three trading sessions the spread has tested the lower boundaries ($8.25/bbl) of the trading range and the upper range resistance and has failed to breach either area. The spread is still trading within the boundaries of the trading range that has been in play since April but as of this writing it is now close to a test of the lower range support level.
The API reported a modest draw in Cushing inventories as well as small draw in PADD 2 crude oil stocks. The API and EIA report have been very consistent in their assessment of Cushing inventories for the last several months and as such there is likely to be a similar draw in Cushing stocks in the EIA report due out later this morning. This is a mildly bearish data point for the spread and one the market is currently focusing on at the moment.
I have been indicating that I expect the spread to continue to narrow going forward especially now that it appears that the latest short covering, widening move was very short lived. It does not mean that there will not be further attempts at widening but the trading activity since yesterday does not suggest that it will be in the very short term.
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 2.7% or the highest level of the year for the EMI Index. 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 so far this week.
As I suggested the EIA in its latest Short Term Energy Outlook report lowered its oil demand growth forecast for both 2013 and 2014… the second demand reduction in the last two monthly reports. The slowing of global oil demand continues to be the single main negative fundamental price driver keeping a lid on oil prices. The main oil related highlights from the report are shown below. The OPEC report is due out Friday while the IEA report hits the media airwaves on Tuesday, May 14. I expect both of these reports to also reduce their forecasts for oil demand growth.
- EIA estimates that global liquid fuels consumption outpaced production in the first quarter of 2013, resulting in an average draw in global liquid fuel stocks of 1.2 million barrels per day (bbl/d), which is much higher than the average 0.3-million-bbl/d draw over the last 5 years but consistent with the average 1.1-million-bbl/d draw over the last 10 years. EIA expects world oil production to exceed consumption in the second quarter of 2013, resulting in an average 0.5-million-bbl/d build in global oil stocks, which is consistent with the recent decline in crude oil prices. EIA expects the world oil market to tighten somewhat in the third quarter of 2013 as world demand reaches its summer peak, and to loosen again in the last quarter of the year as world supply grows.
- World liquid fuels consumption grew by 0.7 million bbl/d in 2012 to reach 89.0 million bbl/d. EIA expects growth will be higher over the next two years because of a moderate recovery in global economic growth so that world consumption grows by 0.9 million bbl/d in 2013 and by 1.2 million bbl/d in 2014.
- Non-OECD Asia, particularly China, is the leading contributor to projected global consumption growth. EIA expects refinery crude oil inputs in China to increase in 2013 as new refining capacity continues to come on line and investment in the property market and infrastructure sectors expands. Recent indicators of weaker industrial data at the beginning of 2013 signaled slower economic growth than in prior years and a downside risk to robust oil demand growth. EIA estimates that liquid fuels consumption in China increased by 380,000 bbl/d in 2012. Projected consumption in China will increase by 450,000 bbl/d in 2013 and by 470,000 bbl/d in 2014, albeit still lower than the average annual growth of about 520,000 bbl/d from 2004 through 2012.
- OECD liquid fuels consumption fell by 0.6 million bbl/d in 2012. EIA projects OECD consumption to decline by an additional 0.4 million bbl/d in 2013 and 0.2 million bbl/d in 2014, largely because of declining consumption in Europe and Japan.
- EIA projects non-OPEC liquid fuels production will increase by 1.1 million bbl/d in 2013 and by 1.8 million bbl/d in 2014, an upward revision in the 2014 growth rate of 0.2 million bbl/d from last month's STEO. North America accounts for most of the projected growth in non-OPEC supply over the next two years because of continued production growth from U.S. tight oil formations and Canadian oil sands. EIA expects non-OPEC supply to also grow in Central and South America by an average of 160,000 bbl/d each year over the next two years, as Brazil and Colombia bring new production on line.
- The U.S. crude oil production forecast has been revised upward by 120,000 bb/d in 2013 and 310,000 bbl/d in 2014 from last month's STEO. Production will rise from an average of 7.1 million bbl/d in the first quarter of 2013 to 8.5 million bbl/d in the fourth quarter of 2014. The growing supply of domestic light crude oil in the Midcontinent has already prompted both midstream and downstream changes. Pipelines like Seaway that were once used to carry imported oil up from Gulf Coast ports to reach Midwest refiners have been reversed and are moving inland crude oil down to the Gulf, and their capacity is being dramatically expanded. New pipeline infrastructure is also under construction, including the southern portion of the Keystone XL project, which is slated to be in operation by year-end, and more has been proposed. There have also been major developments in rail transport, where shipments of crude increased dramatically in 2012 compared to 2011. Significant changes in the refining industry are expected over the next few years to accommodate this fast-growing domestic supply of light-sweet crude oil.
- Projected OPEC total supply falls by 0.5 million bbl/d in 2013 and then rises by 0.1 million bbl/d in 2014. Most of the decline in 2013 comes from Saudi Arabia in response to non-OPEC supply growth, while Iraq and Angola account for most of the increase in 2014.
Tuesday's API report was bearish for crude oil and distillate fuel and mostly neutral for gasoline. There were no major surprises in the API data as most of the data points came in within the range of market expectations. Total crude oil stocks increased by 0.7 million barrels versus an expectation for a modest build of about 1.8 million barrels as crude oil imports increased while refinery run rates also increased by 1.8%. The API reported a larger than expected draw in distillate fuel inventories vs. an expectation for a smaller build. Gasoline stocks declined within the expectations.
The entire oil complex is still in negative territory 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 0.3 million barrels while Cushing stock decreased by 0.646 million barrels. On the week gasoline stocks decreased by about 0.2 million barrels while distillate fuel stocks increased 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 modest build in distillate fuel... as some areas of the U.S. returned to spring like temperatures during the report period... and a small 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 1.8 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 17.6 million barrels while the overhang vs. the five year average for the same week will come in around 34.5 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 but as discussed in detail above other factors are in play and are likely to offset this driver.
With refinery runs expected to increase by 0.2% I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.3 million barrels which would result in the gasoline year over year surplus of around 8.6 million barrels while the surplus vs. the five year average for the same week will come in around 3.8 million barrels.
Distillate fuel is projected to increase by 0.6 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories vs. last year will likely now be about 4.4 million barrels below last year while the deficit vs. the five year average will come in around 17.8 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 neutral. Global demand growth is still looking like it is turning to the downside. On the other hand the market has been pushing oil and other commodity values higher as more liquidity from advanced country central banks continues.
I am maintaining my view at neutral for Nat Gas and keeping my bias at cautiously bearish as today’s price reversal and breaching of the lower range support level suggests lower prices may still be in the cards. The fundamentals are less supportive after last week’s inventory snapshot.
Markets are mostly lower ahead of the US trading session as shown in the following table.
Dominick A. Chirichella