Quote of the Day
Obstacles are those frightful things you see when you take your eyes off your goal.
Oil prices (NYMEX:CLV13) are drifting lower as the immediacy of a U.S. strike on Syria has eased over the last several days. The U.S. President is currently on his own insofar as support from traditional European allies (at the moment), and is in the midst of lobbying key figures in the U.S. Congress ahead of their vote on military intervention next week sometime. Several key U.S. political figures in Congress have voiced support for a limited strike in Syria. However, this is very unpopular with the American public as most polls I have seen show the majority of Americans against any involvement in Syria. Although most times the U.S. Congress votes in favor for a specific Presidential request when it comes to military involvement, the U.S. public may be the swaying factor in next week’s vote.
In any event, even if the U.S. does strike Syria it is likely to be very limited and not involve any ground troops or escalation. As such the unintended consequences from such an attack are also likely to be limited. I do not expect any new oil supply interruptions coming from the region as a result of a limited attack on Syria. I would also expect the U.S. and/or the IEA to release oil from the SPR if there are any signs of supply issues as a result of an attack.
For now the market sentiment has eased slightly. Prices have declined off of last week’s highs. However, I do not expect a major collapse in oil prices anytime soon as the underlying issues in the oil patch is not so much Syria rather it is the plethora of supply issues coming from places like Libya. In fact Reuters is reporting that Libyan oil output has declined further to around 150,000 bpd and lower than last week’s estimate of 250,000 bpd as the strikes and protestors continue to disrupt supply. Until the international crude oil supply issues are resolved the price of oil is likely to remain relatively firm with or without an attack on Syria.
Global equity markets have responded favorably to a changing of the timeline on an attack on Syria. Equity values have recovered all of last week’s losses with the EMI Index now higher by about 2.5% for the week to date. The year to date loss of the Index is now at 1.6% with seven of the 10 bourses in the Index still in positive territory for the year. Japan remains on top of the leader board while Brazil is still holding down the bottom spot but is off its worst levels of the year. Global equity market have been a positive price driver for the oil complex but offset somewhat by the rising US dollar Index.
There are now two low probability events in the tropics with third one dissipating over the last 24 hours. The closest event has a 20% chance of strengthening to a tropical cyclone over the next 48 hours and is sitting around the Yucatan Peninsula. The other event is in the northeastern Caribbean and has a 30% chance of strengthening. At the moment neither of these events are a threat to U.S. Gulf Coast oil and Nat Gas producing operations. With the tropical activity picking up, it is time to keep the tropics high on the radar list of events that could potentially have an impact on oil and Nat Gas production in the U.S. Gulf and thus prices.
This week's round of oil inventory reports has been delayed by one day due to the holiday this week. The API data is being released on Wednesday afternoon followed by the EIA report hitting the media airwaves on Thursday at 11 am. My projections for this week’s inventory report are summarized in the following table. I am expecting a draw in crude oil inventories with a build in distillate fuel stocks and a small draw in gasoline.
I am expecting crude oil stocks to decrease by about 1 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 1.9 million barrels while the overhang versus the five year average for the same week will come in around 19.5 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease modestly for the tenth week in a row and continue its destocking trend. This will be bearish for the Brent/WTI spread but with the geopolitical risk and supply interruptions in MENA 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 0.2% I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.2 million barrels which would result in the gasoline year over year surplus coming in around 21.1 million barrels while the surplus versus the five year average for the same week will come in around 13.4 million barrels. With the U.S. summer driving season now in the history books gasoline supplies are 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 0.2 million barrels above last year while the deficit versus the five year average will come in around 22.4 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 not in directional sync with the projections. 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 everything in the complex.
I am keeping my oil view and bias at neutral as the market continues to focus on Syria and the plethora of supply interruptions around the world but the immediacy of Syria has eased over the last 24 hours. Currently market participants are now in a wait and see mode as they try to determine when an attack takes place and what will be the response.
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 mixed heading into the U.S. trading session as shown in the following table.
Dominick A. Chirichella