Quote of the Day
Happiness is not determined by what is going on around you, it’s what going on inside you.
Oil prices are starting the day higher after a mostly bullish API oil inventory report released late yesterday afternoon. The main surprise was a 7.8 million barrels draw in crude oil stocks (see below for a more detailed discussion). The API data is setting the stage for the market to place even more importance on this morning’s EIA oil inventory data release. The EIA data is more widely followed and as such the market is impacted more directly from the EIA data. This morning the trading session will be driven by oil fundamentals, especially if the EIA data is in sync with the API data.
That said the macroeconomic data activity is starting to pick up as the ever important monthly jobs data cycle gets underway today. Jobs week kicks off this morning with the ADP private jobs survey. The market is looking for 160,000 new private sector jobs. Tomorrow the weekly initial jobless claims will be released followed by the main event on Friday… the U.S. nonfarm payroll data. The market is currently looking for nonfarm payroll data to show 165,000 new jobs were created in May with the headline unemployment rate holding steady at 7.5%. The jobs data has been elevated in importance as the one of the Fed’s economic measurement gauges of QE is tied to the unemployment rate.
Global equities have continued to depreciate in value over the last 24 hours. The EMI Global Equity Index is now lower by 0.62% for the week resulting in the year to date gain widening to 0.7%. Japan was the big loser overnight shedding another 3.8% and thus lowering its year to date to half of what it was just several weeks ago (currently at 25.2%). The U.S. and London are the other two bourses still showing double-digit gains for the year… all QE countries. Brazil and Hong Kong remain in the loss column for the year. Currently global equities are a negative price driver for the oil complex.
The tropical weather pattern in the Yucatan is still hanging around. At the moment the weather pattern has a medium chance or 40% probability of becoming a tropical cyclone during the next 48 hours as it drifts generally northward on Wednesday and more quickly northeastward starting on Thursday. At the moment this weather pattern has a very low probability of impacting oil and Nat Gas production in the Gulf of Mexico as the storm is currently projected to move toward Florida and then up the east coast of the U.S.. As long as it is in the proximity of the Gulf Coast we will continue to keep it on our radar.
Wednesday's API report was bullish across the board with draw for crude oil and gasoline and a much smaller than expected build in distillate fuel. Total crude oil stocks decreased by a surprising 7.8 million barrels versus an expectation for a small draw of about 0.2 million barrels as crude oil imports decreased strongly while refinery run rates increased by 1.1%. The API reported a much smaller than expected build in distillate fuel inventories and a surprise draw in gasoline stocks.
The entire oil complex is in positive territory heading into the EIA oil inventory report to be released at 10:30 AM EST on today. 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. On the week gasoline stocks decreased by about 1.3 million barrels while distillate fuel stocks increased by about 0.2 million barrels.
The API reported Cushing crude oil stocks decreased by 0.454 million barrels or the first draw after three weeks of builds. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the spread but at the moment the spread momentum is still biased toward the widening pattern. The July spread is in the vicinity of the $10/bbl technical resistance area. The short term direction is likely to be dependent on the outcome of Cushing and PADD 2 stocks in today EIA report.
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 modest post-holiday build in gasoline stocks.
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 12.8 million barrels while the overhang versus the five year average for the same week will come in around 41.6 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decline slightly after a month of builds. This will be neutral to slightly bearish for the Brent/WTI spread but as discussed in detail above other factors are in play that are driving the spread in its current widening trend.
With refinery runs expected to increase by 0.4% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by 1.1 million barrels which would result in the gasoline year over year surplus of around 16.8 million barrels while the surplus versus the five year average for the same week will come in around 10.6 million barrels.
Distillate fuel is projected to increase by 1.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2.2 million barrels below last year while the deficit versus the five year average will come in around 13.7 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 mostly in directional sync with some 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 keeping my bias at cautiously bearish as prices have breached the current support level. Global demand growth is still looking like it is turning to the downside. Even the externals have turned into the negative area in the short term.
I am maintaining my view at neutral and bias at cautiously bearish after this week’s price reversal and breaching of the range support level driven by a neutral inventory report and a fundamental picture that is looking much less supportive than over the last few weeks.
Markets are mostly higher as shown in the following table.
Dominick A. Chirichella