Quote of the Day
I do not think there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes almost everything else, even nature.
John D. Rockefeller
Another variable hits a stimulus supported developed world economy today… the U.K. The Bank of England is no longer promising lower rates forever as it has announced it is linking its QE program to the unemployment rate much like the U.S. The BOE is pledging to keep its benchmark interest rate and bond purchase program at current levels until the UK’s jobless rate falls to 7%. Equity markets have been digesting the BOE comments from a bearish perspective with most all global equity market lower as of this writing. Currently in the equity sentiment mix is the latest industrial output increase in Germany today. This is another indication that the EU recession may possibly be starting to form a bottom.
On the other hand oil prices (NYMEX:CLU13) have been able to remain in positive territory for the session so far as the market viewed last night’s API report as biased to the bullish side. The report showed a large decline in crude oil stocks and yet another significant decline in Cushing crude oil inventories. The Brent/WTI spread has moved back to the defensive after a light round of short covering during Tuesday’s trading session. The spread remains in a trading range bounded by parity on the support side and around $2.50/bbl on the resistance side.
Not only are Cushing stocks still in a strong declining pattern but North Sea production is returning after maintenance with no issues. However, there is still further maintenance work to be done in the North Sea, which should serve to keep the spread from narrowing strongly in the short term.
Global equity markets declined strongly over the last 24 hours. The EMI Global Equity Index declined across the board with Japan falling the most on a percentage basis. The Index is now lower by 2% for the week to date with the loss for 2013 now expanding to 4.8%. Global equity markets are currently a negative price catalyst for the oil complex as well as the broader commodity markets.
The EIA released their Short Term Energy Outlook yesterday afternoon. Following are the main oil related highlights from the report.
- The recent increase in crude oil and liquid fuels production disruptions, which reached nearly 2.7 million bbl/d in July 2013, contributed to the recent increase in crude oil prices. During July, non-OPEC supply disruptions totaled about 800,000 bbl/d of liquid fuels, with the remaining 1.9 million bbl/d of the volume disruption occurring among OPEC producers. This level of crude oil production outages among OPEC producers is the highest since at least January 2009, and includes disruptions in Iran, Iraq, Libya and Nigeria.
- EIA estimates that global liquid fuels production outpaced consumption in the second quarter of 2013, resulting in an average global liquid fuel stock build of 260,000 bbl/d compared with an average second quarter stock draw of about 210,000 bbl/d over the previous four years. Projected global liquid fuels consumption outpaces liquid fuels production in the third quarter of 2013 with estimated global inventory withdrawal averaging 380,000 bbl/d, compared with the average withdrawal of 690,000 bbl/d during the same period over the previous four years.
- Total world consumption increased by 390,000 bbl/d from the first quarter to the second quarter of 2013, reaching 89.5 million bbl/d. EIA projects consumption to grow by an additional 940,000 bbl/d in the third quarter of 2013, driven by seasonal consumption patterns. EIA expects annual average total world consumption to increase by 1.1 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 estimates that liquid fuels consumption in China increased by 420,000 bbl/d in 2012. Projected consumption in China increases by 420,000 bbl/d in 2013 and by 440,000 bbl/d in 2014, compared with average annual growth of about 510,000 bbl/d from 2003 through 2012. Recent data indicating a weaker industrial sector and a tightening money supply in the first half of 2013 signaled slower economic growth than in prior years and, if it continues, China's oil demand growth could be lower than projected in the current STEO.
- EIA projects non-OPEC liquid fuels production will increase by 1.3 million bbl/d in 2013 and by 1.7 million bbl/d in 2014. EIA expects non-OPEC liquid fuels production to increase by 540,000 bbl/d between the second and third quarters of 2013, and by an additional 750,000 bbl/d from the third to fourth quarters. North America accounts for most 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 projects total OPEC crude oil and liquids production to decline by 620,000 bbl/d in 2013 from the year before. Most of the decline in 2013 comes from Saudi Arabia in response to non-OPEC supply growth.
- 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 flat in 2013, ending the year at 2.64 billion barrels. Projected inventories increase to 2.69 billion barrels (58.3 days of supply) at the end of 2014.
- EIA expects U.S. crude oil production to rise from an average of 6.5 million bbl/d in 2012 to 7.4 million bbl/d in 2013 and 8.2 million bbl/d in 2014. The continued focus on drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian Basins is expected to account for the bulk of forecast production growth over the next two years. Offshore production from the Gulf of Mexico is forecast to average 1.3 million bbl/d in 2013 and 1.4 million bbl/d in 2014.
Tuesday's API report was mixed with a draw for crude oil and gasoline stocks while distillate fuel inventories built strongly on the week. Total crude oil stocks decreased significantly more than the expectations by 3.7 million barrels as even as crude oil imports increased modesty while refinery run rates increased by 0.2%. The API reported a build in distillate fuel inventories and draw in gasoline stocks.
The oil complex is mixed 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 decreased by about 1.0 million barrels while distillate fuel stocks increased by about 1.5 million barrels.
The API reported Cushing crude oil stocks decreased strongly by 2.2 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 Brent/WTI 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 0.8 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 6.1 million barrels while the overhang versus the five year average for the same week will come in around 19.1 million barrels.
I am expecting crude oil stocks in Cushing, Okla. 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 decrease by 0.2% I am still expecting a 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 17.9 million barrels while the surplus versus the five-year average for the same week will come in around 11.2 million barrels. With a major portion of the U.S. summer driving season already in the history books, gasoline supplies will be more than adequate going forward as total gasoline stocks remain well above both last year and the so called normal five year average.
Distillate fuel is projected to decrease by 0.5 million barrels as exports of distillate fuel out of the US Gulf remains robust. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2 million barrels above last year while the deficit versus the five year average will come in around 23.3 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 mixed 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 keeping my bias at cautiously bullish for the short term as the downside correction seems to be over for now. The strong destocking pattern of crude oil in the U.S. Midwest is also acting as a supporting catalyst for the entire complex.
I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture has shifted as the temperatures across the U.S. do not appear to be moving back to warmer than normal weather anytime soon.
Markets are mixed heading into the U.S. trading session as shown in the following table.
Dominick A. Chirichella