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The combo of a bearish U.S. crude oil inventory report on Monday followed by expectations for another large build in crude oil stocks in Wednesday’s EIA oil inventory report sent futures prices tumbling on expiration day for the November WTI contract (NYMEX:CLX13). The rest of the WTI forward curve followed suit declining across the board. The Dec/Jan contango continued to widen while the Dec Brent/WTI spread surged higher by over 17% of about $1.70/bbl.
Market participants pretty much ignored the bearish unemployment number insofar as WTI was concerned but did in fact view it favorably for Brent. A weak jobs report suggests to the market that tapering of QE3 may not come in the short term. Brent ended the day in positive territory with only modest losses for US refined products as the WTI based crack spreads widened modestly on the day. A widening of the WTI based cracks suggests that US refiners are going to ramp up very quickly once maintenance season is over as US refiners have a noticeable advantage over European based refiners which are tied to a much higher valued Brent price.
The market remains bearish toward WTI on concerns of a potentially growing surplus of crude oil in the US. That said PADD3 total crude oil stocks are only about 3.8 million barrels above last year at this time while Cushing stocks are 11.1 million barrels lower. So at the moment there is not a huge surplus of crude oil in the USGC compared to last year but the market is viewing the recent increase in PADD3 stocks as a potential growing surplus in progress and thus bearish for WTI.
On Tuesday the EIA released a new Drilling Productivity Report for the US. EIA's new Drilling Productivity Report (DPR) takes a fresh look at oil and natural gas production, starting with an assessment of how and where drilling for hydrocarbons is taking place. The six regions analyzed in the report account for nearly 90% of US oil production growth and virtually all domestic Natural Gas production growth during the 2011-2012 period. Following are some of the highlights of the report:
- Total crude oil production from the six areas is expected in increase by about 62,000 bpd in November compared to October production with the majority of the increasing coming from Bakken and Eagle Ford.
- Total crude oil production for the six areas is expected to average 3.7 million barrels per day.
- Bakken month over month (November over October) crude oil production expected to increase by 26 mbpd to about 961 mbpd.
- Eagle Ford month over month (November over October) crude oil production expected to increase by 24 mbpd to about 1.1 million bpd.
- Haynesville month over month (November over October) crude oil production expected to increase marginally by 1 mbpd to about 62.1 mbpd.
- Marcellus month over month (November over October) crude oil production expected to increase slightly by 3 mbpd to about 51.2 mbpd.
- Niobrara month over month (November over October) crude oil production expected to increase by 7 mbpd to about 267 mbpd.
- Permian month over month (November over October) crude oil production expected to increase slightly by 1 mbpd to about 1.3 million bpd.
Tuesday's API report was mixed with a bias to the bearish side. Total crude oil stocks increased more than the expectations by 3 million barrels. The API reported a modest draw in gasoline inventories and a surprise build in distillate fuel stocks. Total inventories of crude oil and refined products increased modestly on the week.
The oil complex is mostly lower 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 0.5 million barrels while distillate fuel stocks increased by about 0.8 million barrels.
The API reported Cushing crude oil stocks increased by 0.423 million barrels for the second weekly build in a row. 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 bullish for the Brent/WTI spread.
My projections for this week’s inventory report are summarized in the following 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 2.8 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will show a surplus of 2.2 million barrels while the overhang versus the five year average for the same week will come in at 41.3 million barrels.
I am expecting crude oil stocks in Cushing, Ok to increase modestly for the second week in a row. This will be bullish for the Brent/WTI spread but with the surge in the spread this week there may be minimal reaction to a small build in Cushing stocks.
With refinery runs expected to decrease by 0.2% I am still expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 0.6 million barrels which would result in the gasoline year over year surplus coming in around 19.3 million barrels while the surplus versus the five year average for the same week will come in around 12.6 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 1.5 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 4.7 million barrels above last year while the deficit versus the five year average will come in around 22.8 million barrels.
Yesterday’s nonfarm payroll data was bearish as it came in showing only 148,000 new jobs created versus an expectation for 180,000 new jobs. The headline unemployment rate dropped to 7.2% which was primarily driven by another reduction in the participation rate rather than due to the paltry job gains. The September number suggests that the jobs market may be stalling as this number was prior to the government shutdown. It also suggests that the Fed may prolong any tapering to its QE3 program until there are more positive signs to the employment side of the economy. Overall the report was bullish for risk asset markets including the oil complex.
Global equities reacted positively to the underperformance in the jobs data. The EMI Global Equity Index added about 0.37% since the close of Asian trading. The year to date gain widened to 4.9% or another new year to date high. With Asia yet to trade based on the US jobs data the global equity index is likely to increase further during the overnight trading hours. Global equities are a positive price driver for the oil complex as well as the broader commodity complex.
I am maintaining my oil view and bias at neutral for the overall complex but bearish for WTI and mildly supportive for Brent and the rest of the oil complex. The oil complex is going through a major transition with supplies robust on the US side of the equation but with ongoing problems in several international supply locations.
I am maintaining my Nat Gas view at neutral and moving my bias to cautiously bearish as the market sentiment seems to be changing once again as the market has now failed to not only breach the recent range high but has actually failed to hold support as it slipped back into a new lower trading range.
Markets are mostly lower into the Asian trading session as shown in the following table.
Dominick A. Chirichella