Quote of the Day
To expect defeat is nine-tenths of defeat itself.
Oil prices are relatively steady this morning after another round of selling hit the complex on Tuesday. The bearish monthly fundamental reports along with a fading equity market were the catalysts for yesterday’s selling. Adding more fuel to the selling was the bearish API report that showed a huge build in crude oil stocks as a result of a large increase in imports (see below for more details). The previous week both the API and EIA showed a large unexpected decline in crude oil inventories… due to a decline in imports. As I said last week imports are made up pretty quickly as we already saw in this week’s stock report.
On a positive note there was some upbeat macroeconomic data out of Europe today. The EU showed a 0.4% jump in industrial production while U.K. jobless claims fell more than expected. The EU economy may be starting to stabilize, but even so it is not going to result in any significant increase in oil consumption over the short- to medium-term.
Global equity markets continued to lose ground over the last 24 hours. The EMI Index is lower by 0.55% over the last trading day with the year to date loss widening to 4.6% and another new low for the year. There are four bourses in the negative column for 2013 with Brazil now showing a year to date loss of 18.3%. Global equities continue to act as a negative price catalyst for the oil complex as well as the broader commodity complex.
The IEA also just released their monthly oil market assessment and also lowered global oil consumption slightly for 2013. Following are the main IEA report highlights.
- Futures prices for benchmark grades traded in a narrow range in May and edged lower in early June. Bearish market sentiment prevailed throughout most of May against the backdrop of a more anemic economic outlook. Brent last traded at $102.15/bbl while WTI was pegged at $94.50/bbl.
- The forecast of global oil demand growth is little changed at 785 kb/d (0.9%) for 2013. Absolute demand estimates have been trimmed on account of revised historical data for Russia.
- Global supplies edged lower by 90 kb/d m-o-m to 91.2 mb/d in May on Canadian maintenance, but rose by 180 kb/d y-o-y, led by OPEC NGLs and non-OPEC supply. Maintenance will cut North Sea supplies from 3.0 mb/d in 1Q13 to 2.6 mb/d in 3Q13. Non-OPEC supply growth is forecast at 1.1 mb/d for 2013, unchanged since last month.
- OPEC crude oil supply in May rose by 135 kb/d to 30.89 mb/d, a seven-month high. Increased output from Saudi Arabia, Iran, the UAE and Kuwait was partially offset by reduced supplies from Iraq, Libya and Nigeria. The ‘call on OPEC crude and stock change’ for 2H13 was trimmed by 200 kb/d to 29.8 mb/d due to lower demand expectations.
- The seasonal ramp-up in global crude throughputs is expected to be steeper than normal this year, with runs increasing by 2.2 mb/d from 2Q13 to 3Q13. That seasonal increase, centered in the non-OECD, is due to new Saudi distillation capacity, increasing Chinese runs after heavy spring maintenance, and recovering throughput at Venezuela’s Amuay plant after a 2012 fire.
- OECD commercial oil stocks built by seasonal 16.7 mb in April, to 2 680 mb, led by crude oil, NGLs and refinery feedstock’s. On a forward cover basis, OECD product stocks fell seasonally by 0.2 days, to 30.6 days. Preliminary data suggest total oil stocks built by a further 11.1 mb in May.
The EIA released their latest Short Term Energy outlook yesterday afternoon. The EIA joined OPEC in lowering their projection for oil consumption in 2013. Following are the main oil related highlights.
- World liquid fuels consumption grew by 0.8 million bbl/d in 2012 to reach 89.2 million bbl/d. EIA expects world consumption to grow 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. EIA estimates that liquid fuels consumption in China increased by 380,000 bbl/d in 2012. 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. Projected consumption increases by 420,000 bbl/d in 2013 and by 430,000 bbl/d in 2014, compared with 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 0.5 million bbl/d in 2013 and 0.2 million bbl/d in 2014, largely because of declining consumption in Europe and Japan.
- EIA projects liquid fuels production by countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC) will increase by 1.2 million bbl/d in 2013 and by 1.6 million bbl/d in 2014. North America accounts for much 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.
- Projected OPEC total supply, which increased by 1.2 million bbl/d in 2012, falls by 0.4 million bbl/d in 2013 and by another 0.1 million bbl/d in 2014. Most of the decline in 2013 comes from Saudi Arabia in response to non-OPEC supply growth, although Saudi production increases for the next few months because of seasonal demand. Iraq and Angola account for most of the increase in 2014. At the last OPEC meeting on May 31, 2013, the organization decided to retain its production target of 30 million bbl/d through the rest of 2013.
- EIA estimates that OECD commercial oil inventories at the end of 2012 totaled 2.65 billion barrels, equivalent to 57.7 days of supply. Projected OECD oil inventories stay relatively steady in 2013, ending the year at 2.64 billion barrels (57.3 days of supply). Projected inventories increase to 2.68 billion barrels (58.3 days of supply) at the end of 2014.
- The NOAA Atlantic Hurricane Season Outlook predicts that the Atlantic Basin likely will experience above-normal tropical weather activity during the current hurricane season. EIA estimates that the median outcome for shut-in crude oil production in the federally administered Gulf of Mexico because of disruptions during the 2013 hurricane season is 19 million barrels. There is a wide range of uncertainty around this forecast (see the 2013 Outlook for Hurricane-Related Production Outages in the Gulf of Mexico). EIA's simulation results indicate a 58‐percent probability of offshore crude oil production experiencing outages during the current hurricane season that are equal to or larger than the 14 million barrels of production shut in during the 2012 hurricane season.
Wednesday's API report was bearish across the board with build in crude oil, distillate fuel and gasoline. Total crude oil stocks increased by a 9 million barrels after a 7.8 million barrel draw the previous as crude oil imports increased strongly while refinery run rates decreased by 0.2%. The API reported a smaller than expected build in distillate fuel inventories and a build in gasoline stocks within the expectations.
The entire oil complex is hovering around the unchanged mark as of this writing and heading into the EIA oil inventory report to be released at 10:30 AM EST 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 increased by about 1 million barrels while distillate fuel stocks increased by about 0.2 million barrels.
The API reported Cushing crude oil stocks decreased by 0.768 million barrels or the second weekly draw in a row. 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. The July spread is still trading in the new lower trading range and below the $8.25/bbl resistance level for the second trading session in a row. The short term direction is likely to be dependent on the outcome of Cushing and PADD 2 stocks in today EIA report with the momentum suggesting a further narrowing of the spread.
My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, and in distillate fuel... as many areas of the U.S. returned to spring like temperatures during the report period... and a small build in gasoline stocks.
I am expecting crude oil stocks to increase by about 1 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 7.7 million barrels while the overhang versus the five year average for the same week will come in around 36.5 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decline for the second week in a row after a month of builds. This will be bearish for the Brent/WTI spread as the fundamentals are in play and are driving the spread in its current narrowing trend.
With refinery runs expected to increase by 0.3% I am expecting a small build in gasoline stocks. Gasoline stocks are expected to increase by 0.3 million barrels which would result in the gasoline year over year surplus of around 15.6 million barrels while the surplus versus the five year average for the same week will come in around 9.4 million barrels.
Distillate fuel is projected to increase by 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 4.3 million barrels below last year while the deficit versus the five year average will come in around 11.6 million barrels.
I am maintaining my view of the entire complex at neutral and keeping my bias at neutral. 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 cautiously bearish after yet another bearish inventory report and another breaching of the trading range low. The fundamental picture is turning more bearish and is looking much less supportive than over the last few weeks.
Markets are mixed as shown in the following table.
Dominick A. Chirichella