Quote of the Day
A discovery is said to be an accident meeting a prepared mind.
The oil complex is drifting lower after a mixed API inventory report and ahead of the more widely followed EIA inventory report as participants also await U.S. Fed Chairman Bernanke’s comments before Congress today. The overall fundamentals have been improving over the last several weeks with large declines in total oil stocks in the U.S. of over 21 million barrels. Last night’s API report was mixed with a draw in crude oil (NYMEX:CLQ13) but sizeable builds in refined products. If the EIA report is in sync with the API report (often times it is not) it could suggest that the large destocking of oil stocks over the last several weeks might just be a short term trend rather than the start of a longer term destocking pattern. Today’s EIA inventory report is likely to be a modest market mover.
The newly anointed spot September Brent/WTI spread has been relatively flat over the last few days with the spread currently trading in a tight range of around $2/bbl on the low end to about $2.75/bbl on the upper, resistance level. Last night’s API report showed only a small decline in Cushing stocks after much larger declines over the two previous weeks. The API and EIA Cushing stock number has been relatively consistent for the last several months and as such today’s EIA report is likely to show a similar small decline in stocks.
The Cushing inventory snapshot is a neutral for the spread as the market was looking for a larger decline in stocks. I am still of the opinion that the spread could hit parity even earlier than the end of the year. Certainly that will require the destocking of oil in Cushing to continue as well as the oil heading to the USGC to actually not result in a new surplus just at another location.
Today U.S. Fed Chairman Bernanke starts his two day testimony before Congress. The market will be watching the proceedings and likely parsing every word he says to see if there are any new clues as to when the Fed is likely to begin to wean the U.S. economy off of the massive quantitative easing program that has been in play since the heart of the financial crisis. Over the last several weeks there have been mixed views regarding QE3 with the market leaning toward a view that suggests the Fed may not begin to shut down the program this year. Needless to say most risk asset market will be impacted by the comments today… at least for the short term.
Global equity markets were relatively flat over the last 24 hours. The EMI Global Equity Index was about unchanged but is still higher by 1 percent for the week to date. The year to data loss remains at 5.1% with seven of the ten bourses in the Index still in positive territory. The next move in most equity markets will be driven by the outcome of Mr. Bernanke’s testimony over the next two days. Over the last 24 hours global equities have been a neutral price driver for the oil complex and the broader commodity markets.
Wednesday's API report was mixed with a draw in crude oil inventories and builds in both gasoline and distillate fuel. Total crude oil stocks decreased greater than the expectations by 2.5 million barrels even as crude oil imports increased strongly while refinery run rates increased by 0.4%. The API reported a build in both distillate fuel inventories and 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 2.6 million barrels while distillate fuel stocks increased by about 3.8 million barrels.
The API reported Cushing crude oil stocks decreased marginally by 88,000 barrels. 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 neutral for the spread.
My projections for this week’s inventory report are summarized in the above table. I am expecting another modest draw in crude oil inventories, a draw in gasoline and a build in distillate fuel stocks.
I am expecting crude oil stocks to decrease by about 1.8 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 5 million barrels while the overhang versus the five year average for the same week will come in around 26.9 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease this week and continue its destocking trend. This will be bearish for the Brent/WTI spread as the fundamentals are in play and are driving the spread (see above for a more detailed discussion).
With refinery runs expected to increase by 0.2 percent I still expecting a 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 14.6 million barrels while the surplus versus the five year average for the same week will come in around 7 million barrels.
Distillate fuel is projected to increase by 1.8 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2.1 million barrels above last year while the deficit versus the five year average will come in around 17.6 million barrels.
The above 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 small changes in the year over year inventory comparisons for most everything in the complex.
I remain cautiously bullish for the overall oil complex. The overall oil fundamental picture is has been improving over the last several weeks and along with the changing view of how long QE3 may or may not last in the US is providing support to the oil complex on a macro basis.
I am maintaining my Nat Gas view at neutral and my bias at neutral based on a less supportive short term temperature forecast. The fundamental picture could begin to shift if the temperatures do not remain above normal on both coasts.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella