Oil fundamentals bearish as supply set to outstrip demand

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Lowell Thomas

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.

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