Quote of the Day
Success is how high you bounce when you hit bottom.
George S. Patton
Syria remains in the forefront as the main risk asset market catalyst. The U.K. will be offering a UN resolution today that is likely to be vetoed by Russia and China. The U.K. is also scheduled to debate the issues of military intervention in its Parliament on Thursday. The U.S. is still discussing the exact type of strike with most experts expecting a short duration air strike.
The risk asset markets are reacting as they normally do when these types of events are imminent. The U.S. dollar (NYBOT:DXZ13) is stronger vs. most currencies, global equities are lower across the board (see below for more details on equities) and oil prices (NYMEX:CLV13) are higher and holding onto to their gains for the moment. Every geopolitical event that has occurred over the last ten years or so has seen a similar market reaction. Normally once the event happens, and it seems that it is of short duration, markets tend to revert back to more normal value trading levels.
It does not mean I would short the oil market at this point as we do not know what the unintended consequences will be of a strike by the west. We do not know if Iran will retaliate against Israel. We do not know if contagion will spread to the main oil producing countries of the MENA region. All we know at this point in time is the likelihood of a short duration strike is very high and an event that is likely to happen within the next week or so. For now the oil complex should remain firm and those that are in it from the long side should employ trailing stops as the market could move lower strongly when it enters into a reversion mode.
The spot WTI and Brent market are well off of their intraday highs set during overnight trading. The crude oil markets are currently almost $3/bbl off of the intraday high. Oil is holding onto yesterday’s strong gains but for the moment the upside momentum has slowed a tad with today’s gains much more modest than yesterday.
The Brent/WTI spread has also continued to widen with the October spread now approaching the next key technical resistance level of $6/bbl. As has been the case since mid-July when the spread hit parity, the spread has been in a widening pattern driven by the supply side of the equation and hitting the Brent market more strongly than WTI. Certainty the prospects of military intervention in Syria is contributing to the widening of the Brent/WTI spread but the main drivers have been the interruption in supply from a variety of locations around the world. Global crude oil supply is lower by about 3 million barrels per day over the last several months coming from places like Libya, Iraq, North Sea, etc. The spread will remain in a widening pattern until the plethora of supply issues return to more normal operations.
Global equities were pummeled over the last twenty four hours. The EMI Global Equity Index lost 1.73% resulting in the year to date loss widening to 3.9% or back to levels not seen since the middle of July. The Index has not been in positive territory since May. Only two of the bourses in the Index — Japan and the U.S. — are still showing double digit gains for the year. The global equity markets are a negative for oil prices as is the rising U.S. Dollar Index. However, as described above uncertainty tends to have a negative impact on most risk asset markets except the oil complex, which is being driven by the prospects for further supply interruptions.
Tuesday's API report was mixed with a build in crude oil and distillate fuel and a draw in gasoline inventories built. Total crude oil stocks increased more than the expectations by 2.5 million barrels as crude oil imports increased modesty while refinery run rates decreased by 0.4 percent. The API reported a build in distillate fuel inventories and a draw in gasoline stocks that were outside of the expectations.
The oil complex is higher as of this writing (see above reasons) 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 1.1 million barrels while distillate fuel stocks increased by about 3 million barrels.
The API reported Cushing crude oil stocks decreased strongly by 0.8 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 but as I have been discussing in the report the market is focusing more of its attention on supply interruptions and the evolving situation in Syria than the destocking of crude oil in the US Midwest.
My projections for this week’s inventory report are summarized in the following table. I am expecting a small build in crude oil inventories with a build in distillate fuel stocks and a draw in gasoline.
I am expecting crude oil stocks to increase by about 0.5 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 4.9 million barrels while the overhang versus the five year average for the same week will come in around 13.1 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease modestly for the ninth week in a row and continue its destocking trend. This will be bearish for the Brent/WTI spread but with the geopolitical risk in MENA increasing Brent is still likely to widen versus WTI as the risk premium hits the Brent market more strongly.
With refinery runs expected to decrease by 0.3 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.0 million barrels ahead of the long holiday weekend in the US which would result in the gasoline year over year surplus coming in around 16.2 million barrels while the surplus versus the five year average for the same week will come in around 10.2 million barrels. With a major portion of the US summer driving season already in the history books gasoline supplies will continue to 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 increase by 1.0 million barrels even 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 4.3 million barrels above last year while the deficit versus the five year average will come in around 20.2 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 in directional sync with the projections. As such if the actual data is in line with the projections there will only be modest changes in the year over year inventory comparisons for everything in the complex.
I am maintaining my oil view and bias at neutral for the short term as the upside move now seems to be looking a bit toppy and seems to be losing momentum. The strong destocking pattern of crude oil in the US Midwest could act as a floor in any downside correction as well as the ongoing supply issues in the international markets.
I am maintaining my Nat Gas view at neutral and keeping my bias at cautiously bullish on what seems to be a changing weather pattern to a more supportive short term temperature forecast. The fundamental picture could once again shift if the temperatures across the US do actually move back to large areas of warmer than normal weather as the latest NOAA forecast is currently predicting.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella