Quote of the Day
You are free to choose but you are not free from the consequence of your choice.
Oil prices have continued to move higher in anticipation of a friendly outcome to today’s U.S. FOMC meeting. The market has been trading this week on a view that the Fed will remain status quo on its QE and monetary policies in general and give no indication as to when they will be entering a winding down phase. The market will parse every word of the communique as well as how Mr. Bernanke answers questions at the presser after the meeting. The macroeconomic data out of the U.S. has been improving since the last Fed meeting. The main question the market is looking for an answer to is whether the data is improving enough to push the Fed into their winding down phase or are all systems go for a continuation of the massive QE program currently in place?
The G8 meeting ended with a watered down communique… as expected. Nothing further on any major western involvement in Syria with the U.S. still likely going forward with trading and arming the opposition group with small arms. Russia remained the sole dissenter on Syria. For now it does not look like there will be any immediate surge in military activity from the west that could result in an interruption of oil supply from the greater middle east. A modest risk premium remains in the price of oil.
Global equities have continued in recovery mode so far this week after declining for the two previous weeks in a row. The EMI Global Equity Index has gained about 1.3% for the week so far with the year to date loss narrowing to 4.7%. There are still four of the ten bourses in negative territory with Brazil on the bottom and Japan still showing the largest gain for the year. Global equities have been a positive price driver for the oil complex this week.
Wednesday's API report was mixed with a bias to the bullish side after a larger than expected draw in crude oil stocks and distillate fuel. Gasoline stocks built a tad more that the expectations. Total crude oil stocks decreased by 4.3 million barrels after a 9 million barrel draw the previous as crude oil imports decreased strongly while refinery run rates increased by 1.5%. The API reported a surprise draw in distillate fuel inventories and a larger than expected build in gasoline stocks.
The entire oil complex is firm 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 0.9 million barrels while distillate fuel stocks decreased by about 0.6 million barrels.
The API reported Cushing crude oil stocks decreased by 0.674 million barrels or the third 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 $8.60/bbl resistance level for the last week or so. 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 draw in crude oil inventories, and builds in both distillate fuel and gasoline stocks.
I am expecting crude oil stocks to decrease 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 8.4 million barrels while the overhang versus the five year average for the same week will come in around 38.4 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decline for the third 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 to start the trading week. The Brent/WTI spread remains in a longer term narrowing trend (declining another $0.40/bbl today). The spread seems poised for a test of the $7/bbl low for the year possibly as early as sometime this week. With refinery runs increasing in the mid-west of the US the decline in inventories out of Cushing should continue.
With refinery runs expected to increase by 0.2 percent I am expecting a small build in gasoline stocks. Gasoline stocks are expected to increase by 0.5 million barrels which would result in the gasoline year over year surplus of around 20.2 million barrels while the surplus versus the five year average for the same week will come in around 12.2 million barrels.
Distillate fuel is projected to increase by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2.6 million barrels below last year while the deficit versus the five year average will come in around 14.2 million barrels.
The below 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 not 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 oil 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 Nat Gas view to neutral and maintaining my bias at cautiously bullish based on a more supportive short term temperature forecast. The fundamental picture could be starting to shift into a less bearish mode and become more neutral during the second half of June.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella