Quote of the Day
A day without laughter is a day wasted.
With the U.S. government shutdown now in its second day, market participants around the globe remain in a high level of uncertainty as market risk is slowly edging higher. At the moment there is no indication that the stalemate in Washington, D.C. will be over anytime soon as all sides appear to be relatively inflexible in their current position as both Republicans and Democrats seem to be more concerned about the so-called court of public opinion over who is to blame for the shutdown. Until that process is over, a continuing budget resolution is not likely to get through Congress and thus the government will remain in a shutdown mode.
On the fundamental front, oil (NYMEX:CLX13) remains in negative territory after a much larger than expected build in crude oil stocks reported by the API late yesterday afternoon (see below for more details). Oil prices have declined for the last several weeks as the supply issues that have been impacting the global balances seem to be starting to get resolved. With both Russia and Saudi Arabia (two largest oil producers in the world) both producing at very high levels for September, oil seems to be heading for a period of oversupply and thus inventory replenishment as we saw in last night’s API data.
On the geopolitical front Iran’s Parliament has strongly endorsed President Rouhani’s diplomatic bid to dispel mistrust at the UN meeting last week according to an article in Reuters today. Iranian media said that the backing from the assembly, controlled by factions deeply loyal to the Supreme Leader Khamenei, is a further sign that Rouhani has the support of the Iranian establishment. In my view yet another sign that Iran is still saying and currently doing all of the right things to get the attention of the west in their effort to have the sanctions eased.
Until the west and Iran get down to discussing the details of a negotiated settlement it is still a big unknown to say if and when sanctions will be eased and when shut-in Iranian oil will begin to flow. For now I would categorize all of the positives coming from Iran as mildly bearish for the oil markets as more participants are starting to slowly adjust their view toward Iranian oil flowing at some point of time in the medium term.
On the equity front, global equities were mixed but mostly higher in overnight trading as we enter the second day of the U.S. government shutdown. Over the last 24 hours the EMI Global Equity Index has gained about 0.46% resulting in the year-to-date gain widening to 0.9%. After hitting a year to date high during the week of Sept. 20, the Index is now back to the level it was at in the beginning of September. Global equities seem to be shifting back to acting as a positive price driver for the oil complex as well as the broader commodity markets.
The tropics still remain somewhat active but not threatening to U.S. oil and natural gas operations with TS Jerry out in the north Atlantic and a medium probability weather event sitting in the northwestern Caribbean. Conditions are only marginally conducive for further development over the next several days. For now this event is not projected to move to the oil and Nat Gas producing region of the US Gulf of Mexico
Tuesday's API report was mixed with a bias to the bearish side. Total crude oil stocks increased more than the expectations by 4.55 million barrels as crude oil imports increased strongly as refinery run rates decreased by 1.5%. The API reported a modest draw in distillate fuel inventories and greater than the expectations and a larger than expected build in gasoline stocks.
The oil complex is mixed as of this writing (driven by the evolving US Government shutdown 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 3.3 million barrels while distillate fuel stocks decreased by about 1.6 million barrels.
The API reported Cushing crude oil stocks decreased marginally by 0.083 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 for the Brent/WTI spread. However, the spread is currently being driven in the short term by the evolving geopolitics as well as the U.S. situation.
My projections for this week’s inventory report are summarized in the above table. I am expecting a modest build in crude oil inventories with a draw in refined products as refinery run rates are projected to decline.
I am expecting crude oil stocks to increase 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 12.8 million barrels while the overhang versus the five year average for the same week will come in around 14.2 million barrels.
I am expecting crude oil stocks in Cushing, Okla. to decrease slightly for the 14th week in a row of declines but I am expecting the pace of the destocking to continue to slow this week. This will be slightly bearish for the Brent/WTI spread but with the geopolitical risk any narrowing of the spread could be tempered.
With refinery runs expected to decrease by 0.4% I am 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 16.2 million barrels while the surplus versus the five year average for the same week will come in around 10.8 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 decrease by 0.6 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 12.4 million barrels above last year while the deficit versus the five year average will come in around 14.2 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 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 US but negatively impacted by the US government shutdown. 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 US start to return to more normal levels.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella