Quote of the Day
To climb steep hills requires a slow pace at first.
William Shakespeare
The growing market concern over the weakening oil fundamental picture is continuing to pressure oil prices with the complex declining for the fourth trading session in a row. The fact that the U.S. Dollar Index was also strong yesterday contributed to the selling in the oil pits. The rally in equity markets — normally a positive driver for oil prices — was largely ignored with the strong U.S. dollar and prospects for weaker demand turning out to be the main negative price drivers for the complex.
It is interesting in that often times the market discounts the nearby oil fundamentals and tends to focus on the externals, which normally present a forward or perceived view of the future fundamentals. However, over the last week or so the market has become much more focused on the current fundamental picture, which is becoming more and more bearish. As I have been discussing in the newsletter, supply is robust and growing, global oil demand is faltering and U.S. inventories are at the highest level since the 1930s.
On the economic front Germany’s economy expanded less than expected while France fell into recession for the first quarter. France’s economy contracted 0.2% quarter on quarter for Q1 after a 0.2% decline in Q4. The Eurozone reported a decline of 0.2% on a quarter on quarter basis for Q1 vs. a market consensus of 0.1%. Europe’s economy continues to weaken suggesting that oil demand in the region will also weaken going forward.
After spending a week below the key technical support area of $8 to $8.25/bbl the spot Brent/WTI spread was hit with a mild round of short covering which accelerated after the API reported a 541,000 barrel build in Cushing inventories along with a 750,000 barrel crude oil build in PADD 2. The API and the EIA have been relatively consistent in their assessment of Cushing inventories. As such I expect the EIA Cushing number to be in sync with Tuesday’s API number. This is the first build in Cushing crude oil stocks in a month and could be an early turning point from the destocking pattern that has been in play in Cushing for most of the last several months.
In addition Enbridge’s planned shutdown of the Ozark pipeline for 10 days beginning June 10 will reduce the flow of oil from Cushing. The Ozark pipeline has a capacity of 215,000 bpd moving crude oil from Cushing to Wood River, Ill. Enbridge said June’s capacity will be reduced by 40% or basically by about 2.5 million barrels. This could certainly derail the newly emerged destocking pattern that has been in play in Cushing for the last month or so.
Furthermore the Ekofisk field will be down for maintenance in June, which will result in a decline in North Sea production and will be another short term bullish price driver for the spread. We could see the spread settling into the $8 to $10/bbl trading range during the changing inventory pattern out of Cushing as well as during the maintenance in the North Sea.
The EU Commission is investigating oil pricing assessments in Europe. There are concerns that companies may have colluded in reporting prices to Platt’s for a variety of oil products and biofuels. The target companies are Platt’s, Shell, BP and Statoil.
Global equities rebounded over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is now about unchanged for the week with the year to date gain now at 2.3%. The rankings have remained the same with Japan and the U.S. holding the top two spots while Brazil and China are at the bottom of the leader board… both in negative territory for 2013. Equities were a positive price driver or the oil complex but as discussed above other price drivers offset the equity/oil price relationship.
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 1.1 million barrels vs. an expectation for a small draw of about 0.2 million barrels as crude oil imports decreased while refinery run rates also decreased by 0.6 percent. The API reported a draw in distillate fuel inventories within the expectations. Gasoline stocks declined within the market projections.
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 increased by around 0.8 million barrels while Cushing stock increased by 0.541 million barrels. On the week gasoline stocks decreased by about 0.5 million barrels while distillate fuel stocks increased by about 1.9 million barrels.
My projections for this week’s inventory report are summarized in the above table. I am expecting a small draw 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 decrease by about 0.2 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 33.1 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok as the Pegasus pipeline has remained shut down for all of the report period. This will be bullish for the Brent/WTI spread but as discussed in detail above other factors are in play which could dampen the impact of 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 0.5 million barrels which would result in the gasoline year over year surplus of around 10.3 million barrels while the surplus vs. the five year average for the same week will come in around 4.5 million barrels.
Distillate fuel is projected to increase by 0.7 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 1.5 million barrels below last year while the deficit versus the five year average will come in around 15.8 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 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.
Best Regards,
Dominick A. Chirichella
