Quote of the Day
Each problem that I solved became a rule, which served afterwards to solve other problems.
The stalemate in the U.S. continues as both sides seem far apart. On one side the President said he would open a door to talks if the Republicans would pass everything on both the budget and debt side with no variations. On the other side the Republicans want to negotiate a deal agreeable to both sides. Publically it still looks like a deal is far apart. However, what is going on behind closed doors is the unknown. The debt deadline is looming and the partial government slowdown is continuing for now.
Market uncertainty continues at an above normal level as global equities took another hit over the last 24 hours, while oil prices put in another volatile and mixed performance. This pattern is likely to continue until there is a sign that a deal is getting closer.
Global equities declined over the last 24 hours. The EMI Global Equity Index narrowed by 0.21% resulting in the year to date gains dropping back into negative territory (negative 0.20 percent) for the first time since the end of August. Global equities continue to be a negative price driver for the oil complex as well as the broader commodity markets.
On the other side of the equation, the U.S. dollar turned higher overnight on news that that Janet Yellen will be announced as the next U.S. Fed Chairperson. Yellen is viewed as a dovish member of the Fed and one who has continued to support the massive QE programs. For today the rising U.S. dollar is also a negative price driver for the oil complex.
On the tropical weather front there is now only one event in the Atlantic. Currently there is a medium probability weather event about 400 hundred miles southeast of the Cape Verde Islands. At the moment this system has a medium chance (30%) of further development over the next several days. In the short term this event is not a threat to the Gulf Coast but will remain on the radar for the time being.
The EIA released their latest Short Term Energy Outlook (STEO) yesterday. Following are the main oil related highlights.
- EIA projects average U.S. household expenditures for natural gas and propane will increase by 13% and 9%, respectively, this winter heating season (October 1 through March 31) compared with last winter. Projected U.S. household expenditures are 2% higher for electricity and 2% lower for heating oil this winter. Although EIA expects average expenditures for households that heat with natural gas will be significantly higher than last winter, they are still lower than the previous 5-year average.
- EIA expects households heating primarily with heating oil to spend an average of about $46 (2%) less this winter than last winter, reflecting a 5% decrease in prices and a 3% increase in consumption. Although winter temperatures are expected to be similar to last winter nationally, weather in the Northeast is expected to be 3% colder than last winter. Reliance on heating oil is highest in the Northeast, where about 25% of households depend on heating oil for space heating, compared with 6% of households nationally. The state of New York, which accounts for about one-third of the region's heating oil market, has required the use of ultra-low sulfur heating oil since July 2012. A number of other states will begin to move away from higher-sulfur heating oil in the coming years.
- Estimated global liquid fuels supply disruptions in September averaged 3.0 million barrels per day (bbl/d), which is unchanged from the revised August estimate and remains at the highest level since at least January 2011. However, some of Libya's production restarted in the second half of September after coming to a near-halt earlier in the month. EIA expects Libya's production to remain at its current level for October, although output still remains considerably below the precrisis level. EIA expects total unplanned outages from both OPEC and non-OPEC countries to decline in October.
- EIA projects global consumption to grow by 1.0 million bbl/d in 2013 and by another 1.2 million bbl/d in 2014, with China, the Middle East, Central & South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth. Projected OECD liquid fuels consumption declines by 0.2 million bbl/d in 2013 and 0.1 million bbl/d in 2014. The declines in OECD consumption are largely due to lower consumption in Europe and Japan.
- Non-OECD Asia, particularly China, is the leading contributor to projected global consumption growth. EIA estimates that liquid fuels consumption in China will increase by 420,000 bbl/d in 2013 and by a further 430,000 bbl/d in 2014, compared with average annual growth of about 510,000 bbl/d from 2003 through 2012. China's steady growth in oil demand has led it to become the world's largest net oil importer, exceeding the United States in September 2013. EIA forecasts this trend to continue through 2014.
- EIA estimates that OECD commercial oil inventories at the end of 2012 totaled 2.65 billion barrels, equivalent to roughly 58 days of supply. OECD oil inventories are projected to end 2013 at 2.58 billion barrels and end 2014 at 2.57 billion barrels (56 days of supply).
Tuesday's API report was mixed with a slight bias to the bullish side. Total crude oil stocks increased more than the expectations by 2.8 million barrels as crude oil imports increased and as refinery run rates decreased by 2.7 percent. The API reported a modest draw in distillate fuel inventories and a surprise draw in gasoline stocks. Total inventories of crude oil and refined products declined modestly on the week.
The oil complex is mostly higher as of this writing 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 decreased by about 2.8 million barrels while distillate fuel stocks decreased by about 1.1 million barrels.
The API reported Cushing crude oil stocks decreased marginally by 0.156 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 US 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 mixed performance for refined products as refinery run rates are projected to decline again this week.
I am expecting crude oil stocks to increase by about 1.7 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 1 million barrels while the overhang versus the five year average for the same week will come in around 24.4 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease modestly for the 15th 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 0.3% I am still expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels, which would result in the gasoline year-over-year surplus coming in around 25.3 million barrels while the surplus vs. the five year average for the same week will come in around 15.5 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 1 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 7.3 million barrels above last year while the deficit versus the five year average will come in around 20.1 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. but negatively impacted by the U.S. 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 moving my bias to cautiously bullish 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