Quote of the Day
As I get older, I realize that the thing I value the most is good heartedness.
Oil futures (NYMEX:CLX13) markets are trading higher in a modest round of short covering this morning after what was viewed as a bit of a disappointment at the UN yesterday. First there was no face-to-face meeting between Obama and Rouhani as Iran said no to the possibility of a meeting despite Obama announcing in his address to the UN that he was open to a meeting and new talks on Iran’s nuclear program. Secondly Rouhani’s speech to the UN was a disappointment in that he did not offer anything new insofar as moving forward with the nuclear negotiations.
After several weeks of a conciliatory public relations campaign by Iran leading up to the UN meeting, market participants were beginning to view the gestures by Iran as its wanting to get real aggressive in negotiating a deal and thus a potentially bearish outcome for oil. Yesterday’s activity at the UN did not leave oil traders with the same view as before the meeting and speeches.
I view yesterday’s activity as not the end but just a signal that it is still going to take a long time before a negotiated settlement will come into play. As such the sanctions will remain in play and over a million barrels per day of Iranian oil will remain shut-in. However, diplomacy will commence at a high level (Secretary of State Kerry) starting in the short term.
The short covering rally is also fueling the Brent/WTI spread, which has been in a short-term widening pattern over the last several days. The spread is now approaching another key technical resistance level of around $6.70/bbl as the market digests the smaller decline in Cushing crude oil stocks coupled with the prospects that shut-in Iranian oil will not start flowing in the short term even as negotiations restart.
Global equities have been drifting lower over the last 24 hours. The EMI Global Equity Index decreased marginally by 0.17% with the year-to-date gain hovering around 2.6%. Eight of the 10 bourses in the Index remain in positive territory for the year with six of the bourses showing double digit gains for 2014. Japan continues to remain on top of the leader board as QE continues in Japan while Brazil holds the bottom spot. Overall global equities have been a positive price driver for the oil markets as well as the broader commodity complex over the last few weeks.
Tuesday's API report was mixed with a slight bearish bias. Total crude oil stocks decreased less than the expectations by 0.1 million barrels even as crude oil imports decreased strongly but offset as refinery run rates decreased by 2.4%. The API reported a modest build in distillate fuel inventories within the expectations and a build in gasoline stocks vs. a market expectation for a draw.
The oil complex is mostly higher as of this writing (driven by the geopolitics discussed above) and heading into the EIA oil inventory report to be released at 10:30 AM EST Wednesday. 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 0.3 million barrels while distillate fuel stocks increased by about 0.5 million barrels.
The API reported Cushing crude oil stocks decreased by 0.4 million barrels and at a slower pace than has been in play for the last several months. 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 to only slightly bearish for the Brent/WTI spread. However, the spread is currently being driven in the short term by the disappointment from the UN meeting as discussed above.
My projections for this week’s inventory report are summarized in the above table. I am expecting a draw in crude oil inventories with a build in refined products.
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 deficit of 10.6 million barrels while the overhang vs. the five year average for the same week will come in around 16.9 million barrels.
I am expecting crude oil stocks in Cushing, Okla. to decrease slightly for the 13th week in a row of declines but I am expecting the pace of the destocking to slow considerably this week. This will be slightly bullish for the Brent/WTI spread but with the geopolitical risk and supply interruptions in MENA starting to ease a tad any widening of the spread could be tempered.
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 coming in around 19.7 million barrels while the surplus vs. the five-year average for the same week will come in around 9.9 million barrels. 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 0.5 million barrels even as exports of distillate fuel out of the U.S. Gulf remain robust. If the actual EIA data is in sync with my distillate fuel projection inventories vs. last year will likely now be about 3.9 million barrels above last year while the deficit versus the five-year average will come in around 19.7 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 maintaining my oil view and bias at neutral as the geopolitical tensions ease, supply from Libya starts to increase all being offset partially by the ongoing QE program in the U.S. Currently oil market participants seemed to have moved into a risk off mode.
I am maintaining my Nat Gas view at neutral and maintaining my bias at neutral as the market sentiment seems to be changing once again. The fundamental picture could also once again shift as the temperatures across the U.S. start to return to more normal levels.
Markets are mostly higher heading into the U.S. trading session as shown in the following table.
Dominick A. Chirichella