Quote of the Day
An expert is someone who has succeeded in making decisions and judgments simpler through knowing what to pay attention to and what to ignore.
Edward de Bono
The last week or so has been a volatile period for the oil complex. After declining strongly during the second half of last week (after the U.S. Fed announcement) the market has rebounded modestly to start this week only to be treading water ahead of this morning’s EIA weekly inventory report. The technical uptrend that began in the beginning of June ended late last week with the spot WTI futures contract now settling into a lower trading range of $93/bbl on the support side and about $96.25/bbl on the upper resistance end.
The overall fundamental picture has not changed this week with oil stocks in the U.S. at the highest level in more than 25 years. Simply put, oil is well supplied with supply still outstripping demand. There are no indications of any imminent geopolitically driven supply disruptions with all signs pointing to supply growth continuing in non-OPEC countries… in particular the U.S. With the externals starting to turn, oil market participants are starting to focus more attention on the fundamentals and technicals.
Equities and the direction of the U.S. dollar have been the two most supportive price drivers for the oil complex as well as the broader commodity complex throughout most of this year. However, with the U.S. Fed signaling that it is nearing the beginning of the end of the massive quantitative easing programs, the direction of equities and the U.S. dollar have started to turn into a more bearish mode and thus are becoming a negative price driver for the oil complex.
The spot Brent/WTI spread blew through the $7/bbl range support level on news of pipeline issues in oil flow out of Canada earlier in the week. Enbridge reported on Monday that the southern portion of the 345,000 bpd Athabasca pipeline into Hardisty was shut down. That said the pipeline has now started to return toward a more normal level. The exact cause of the small leak is still unknown but there has been heavy rains in the region resulting in floods that could have moved the line and cause the damage.
The spread ended yesterday’s trading session slightly below the $6/bbl mark as the market momentum continues to point toward further narrowing. The spread is now solidly in a new lower trading range of $7/bbl on the upper end and about $5/bbl on the lower, support level. The last time the spread traded at the current level was back in the second half of January of 2011.
The Brent forward curve did not change very much over the last week or so. However, WTI has now also moved into a backwardation throughout the forward curve. The WTI backwardation certainly does not justify any opportunistic stock building at the moment. In fact the economics are suggesting a further reduction in crude oil stocks in Cushing and PADD 2. If the WTI forward curve shape holds, it would be another bearish driver for the Brent/WTI spread.
The spread has been in a long term narrowing mode with occurrences of short term short covering rallies. The current narrowing trend began during the first week of February of this year with the spot spread peaking around the $21.50/bbl level. Since then the spread has declined by about $15.20/bbl or 71%. This has been a major step toward the normalization of the Brent/WTI spread, which I remain of the view will continue to evolve throughout the course of this year. I have been predicting since earlier this year (in the newsletter) that the spread will return to close to parity by the end of this year. I continue to expect the spread to narrow over time especially with more and more infrastructure scheduled to be in place by the end of the year to move oil out of the Cushing area.
Global equities recovered some of their recent losses over the last 24 hours. The EMI Global equity Index increased by 1.45% over the last 24 hours but the Index still remains lower by 0.3% for the week to date. The Index is showing a year to date loss of 8.6% and very near the largest loss of s2013. Four of the ten bourses in the index remain in negative territory for the year with Japan still holding the top spot. Global equities have turned to being more of a negative price driver for the oil complex vs. a major upside support that has been prevalent throughout most of this year.
In his speech on the environment yesterday President Obama said that the Keystone pipeline should be approved only if it does not increase net carbon pollution. He went on to say that the net effects of the pipelines impact on our climate will be absolutely critical to determining whether this project is allowed to go forward. I must say I am not sure why he is signaling out this pipeline and not the many other lines that are currently being built in the U.S. including the southern leg of the Keystone line. It all sounds very political in my view. In addition he is not addressing the growing use of rail to move oil all around the U.S., including Canadian oil, which is nothing other than a moving pipeline.
One of the very controversial pioneers of the oil trading world passed away. Marc Rich died at the age of 78. Rich co-founded commodities company Marc Rich & Co. in 1974, which was renamed Glencore International AG 20 years later when he sold his 51% stake.
Wednesday's API report was mixed with a bias to the bearish side after a smaller than expected draw in crude oil stocks. Gasoline stocks built a tad more that the expectations. Total crude oil stocks decreased by just 28,000 barrels as crude oil imports increased strongly while refinery run rates increased by 2.7%. The API reported a smaller than expected build in distillate fuel inventories and a larger than expected build in gasoline stocks.
The entire oil complex is lower 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 1.3 million barrels while distillate fuel stocks increased by about 0.5 million barrels.
The API reported Cushing crude oil stocks increased by 0.706 million barrels or the first weekly build in about a month. 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 bullish for the spread. However, with the interruption in flow of Canadian oil the spread has continued to narrow (see above for a more detailed discussion).
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 1.5 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 5.3 million barrels while the overhang versus the five year average for the same week will come in around 38.2 million barrels.
I am expecting crude oil stocks in Cushing, Ok to increase for the first week in about a month. This will be bullish for the Brent/WTI spread as the fundamentals are in play and are driving the spread.
With refinery runs expected to increase by 0.2% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year surplus of around 20 million barrels while the surplus vs. the five-year average for the same week will come in around 12.2 million barrels.
Distillate fuel is projected to increase by 1.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 1.7 million barrels below last year while the deficit versus the five year average will come in around 15.5 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 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 and my bias at cautiously bearish after the Fed signaling it could be coming closer to an end of the QE program. In addition 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 bearish based on a less supportive short term temperature forecast. The fundamental picture seems to be starting to shift back to a more neutral mode.
Markets are mixed heading into the U.S. trading session as shown in the following table.
Dominick A. Chirichella