Quote of the Day
The shortest answer is doing.
The fundamentals took control of the short term oil price direction over the last two sessions even though there is still no sign that any of the massive QE programs are going to end anytime soon. Today the main event will be U.S. Fed Chairman Bernanke’s testimony before joint Congressional economic committees as he once again updates the world on the state of the U.S. economic recovery. As is always the case when the Chairman speaks the market will parse his every word to see if there are any signals coming out that suggest how much longer QE3 is going to last.
Back to the fundamentals… although the API oil inventory data often times is misleading it was certainly bearish across the board (see below for more details) and yet another sign that oil fundamentals remain weak at best. There are currently no signs from any of the internal or external data points suggest that oil demand is heading for a growth spurt anytime soon. So the battle between a weakening oil demand picture versus the support coming from the very accommodative monetary policies in the developed world economies continues with the winning side flip flopping back and forth as we have already seen over the last 24 hours.
After losing its widening momentum late last week, the July Brent/WTI spread has breach the $8.25/bbl technical support level and remained below this level for the entire trading week so far. The spread is back in its narrowing trend (at least for the moment) even after the API reported (in last night’s report) a modest 471,000 barrel build in Cushing crude oil inventories. The API and EIA reports have been very consistent in their reporting of Cushing crude oil stocks and as such I would expect a similar build in this morning’s EIA report.
So far the market has not been placing much emphasis on the upcoming June maintenance schedule in the North Sea as the Brent/WTI spread continues to slowly decline. Even though Cushing crude oil stocks increased this week the possibility that additional refining capacity should return in the mid-west increasing crude oil demand the current narrowing of the spread may garner some fundamental support.
In addition last week issues with the flow of Canadian crude oil into the U.S. on the Keystone pipeline resulted in a net reduction into Cushing. The flow of Canadian crude oil into Cushing is now averaging about 40 mbpd below the level it was in the middle of April or prior to the start of all of the interruption issues on the Keystone line from Hardisty that occurred over the last month or so.
The spread is now back in the new lower technical trading range it was in early last week of $8.25 on the upper resistance end and $5.30/bbl on the lower support side of the range. From a technical perspective the spread seems to be entering another narrowing pattern.
Global equities continue to be supported to the upside by the easy monetary policies as shown in the EMI Global Equity Index table below. The Index gained another 0.55 percent since yesterday and is now higher by 1.4 percent for the week. The year to date gain is now at 4.4 percent making another new high for the year. Japan’s bourse broke the 50 percent gain level overnight as the faltering Yen continues to support this export driven economy. Brazil remains the only laggard in the Index but the loss for 2013 has declined to well below the double digit level. Global equity markets have been a positive price support for the oil complex.
Tuesday's API report was bearish across the board with builds for the three main oil commodities. Total crude oil stocks increased by 0.5 million barrels versus an expectation for a small draw of about 0.3 million barrels as crude oil imports increased marginally while refinery run rates decreased by 1.5 percent. The API reported a smaller than expected build in distillate fuel inventories. The large build in gasoline stocks ahead of the upcoming holiday weekend in the US was the big surprise in the report.
The entire oil complex is 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 were slightly lower while Cushing stock increased by 0.471 million barrels. On the week gasoline stocks increased by about 3 million barrels while distillate fuel stocks increased by about 0.5 million barrels.
My projections for this week’s inventory report are summarized in the following table. I am expecting a small draw in crude oil inventories, a modest build in distillate fuel... as many areas of the US returned to spring like temperatures during the report period... and a small draw in gasoline stocks ahead of the first weekend of the so called driving season in the US.
I am expecting crude oil stocks to decrease by about 0.3 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 12.1 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 crude oil stocks in Cushing, Ok to be about unchanged… possible even showing a slight draw even as the Pegasus pipeline has remained shut down for all of the report period. This will be neutral for the Brent/WTI spread but as discussed in detail above other factors are in play that are pushing the spread back into a narrowing trend.
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 16.2 million barrels while the surplus versus the five year average for the same week will come in around 8.1 million barrels.
Distillate fuel is projected to increase by 1.1 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 12.8 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 but moving my bias back to cautiously bullish as prices have breached the next resistance level or are very close to it. Global demand growth is still looking like it is turning to the downside. On the other hand the externals have been pushing oil and other commodity values higher as more liquidity from advanced country central banks continues.
I am maintaining my view and bias at cautiously bullish after this week’s price reversal and breaching of the range resistance level driven by what may be the start of the summer cooling season and thus suggesting higher prices may now be in the cards.
Markets are mostly lower as shown in the following table.
Dominick A. Chirichella