Quote of the Day
Life is like riding a bicycle. To keep your balance you must keep moving.
Markets have been relatively quiet in overnight trading as participants await the outcome of the U.S. Federal Reserve FOMC meeting as well as U.S. GDP data. The market is expecting a status quo from the Fed with little new guidance as to the phasing out of the massive quantitative easing program. The market is expecting U.S. Q2 GDP to come in around 1.1%, or a less than stellar performance for the U.S. economy. The only way the FOMC outcome could turn into a major market mover will be for the Fed to indicate an early ending to QE3. With Q2 GDP expected to be barely above the 1% level and unemployment expected to come in around 7.5% or 1% above the Fed’s threshold I do not expect any surprise ending announcements from the Fed today.
Even with oil prices on the defensive so far this week the spot Nymex WTI contract is heading for about a $7/bbl gain for the month of July or the largest monthly gain in more than a year. As discussed in yesterday’s newsletter from a technical perspective the market formation is one of a pattern that has peaked with the short term tend pointing lower. However, I do not think there is enough downside momentum to push prices significantly lower over the short term. The oil complex seems to be trying to form a trading range for prices to settle into until the uncertainty as to supply and demand are more clearly established.
Since the release of the API data last night WTI has found some support as Cushing stocks declined significantly for the second week in a row. Cushing stocks are back to a level not seen since early in the fourth quarter of 2012. Even with the many issues evolving with several international crude oil producing regions including maintenance reductions in the North Sea the Brent/WTI spread has been hit with a strong round of selling overnight resulting in the spread narrowing almost a $1/bbl as of this writing. I am not sure the widening run is over just yet as I would like to see at least another day of narrowing to start to feel comfortable layering in new shorts.
Global equities are now lower for the week. The EMI Global Equity Index is down by a tad over 1% for the week to date with the yearly loss now sitting at 3.9%. Seven of the ten bourses in the Index still remain in positive territory for 2013 with bourses in countries that have very accommodative monetary policies still holding the top spots in the Index. Brazil and China remain the main laggards in the Index. This week global equities have been a negative price driver for the oil complex and broader commodity complex as participants await today’s FOMC outcome as well as the plethora of macroeconomic data due for the US.
Tuesday's API report was mixed with a draw for crude oil and distillate fuel stocks while gasoline built strongly on the week. Total crude oil stocks decreased less than the expectations by 0.7 million barrels as crude oil imports increased modesty and refinery run rates decreased by 1.2%. The API reported a draw in distillate fuel inventories and build in gasoline stocks.
The entire oil complex is lower (except WTI) 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 1.8 million barrels while distillate fuel stocks decreased by about 0.5 million barrels.
The API reported Cushing crude oil stocks decreased strongly by 1.9 million 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 bearish for the spread.
My projections for this week’s inventory report are summarized in the following table. I am expecting another modest draw in crude oil inventories with a build in both gasoline and distillate fuel stocks.
I am expecting crude oil stocks to decrease by about 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 deficit of 11.4 million barrels while the overhang versus the five year average for the same week will come in around 15.9 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% I am 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 14.3 million barrels while the surplus versus the five year average for the same week will come in around 8.2 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 3.2 million barrels above last year while the deficit versus the five year average will come in around 19.8 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 at neutral with a bias at cautiously bearish for the short term as the downside correction may continue this week. I am continuing to fly the caution flag that the current round of profit taking selling could continue for a few more days.
I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture is beginning to shift as the temperatures across the US do not appear to be moving back to warmer than normal weather anytime soon.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella