Quote of the Day
He who is not every day conquering some fear has not learned the secret of life.
Ralph Waldo Emerson
The tale of two crudes this week with the spot WTI contract (NYMEX:CLZ13) once again under strong selling pressure while the spot Brent contract is modestly higher. The Brent/WTI spread widened by more than 10% overnight. The growing surplus of crude oil in the U.S. is the bearish price driver on the WTI side while the ongoing international supply issues like Libya have been providing support to the Brent contract.
The December Brent/WTI spread is now very close to testing the $12/bbl resistance level that was attempted and failed a week ago. The API reported a huge build in total U.S. crude oil stocks as well as a very large build in Cushing stocks of 2.2 million barrels (see below for a more detailed discussion in inventories). With tightness on the international supply side vs. an abundance of supply in the U.S. and with inventories building again in Cushing, the Brent/WTI spread is not likely to enter into a another narrowing pattern until there are signs that crude oil demand is picking up in the U.S. and the current crude oil inventory building pattern has run its course.
WTI has been in a technical downtrend since peaking in early September. After a few days of a short covering rally, the downtrend seems to be reestablishing itself once again. In addition the fundamentals in the U.S. are pressuring prices and adding downside momentum to the technical downtrend.
On the other hand the spot Brent contract has been in a technical sideways trading pattern with the current price in the middle of the trading range that has been in play since mid-August. Although there are still issues on the international supply side the bearishness coming from the U.S. market is keeping a lid on Brent prices at the moment.
Today the main economic event of the week will hit the media airwaves at mid-day. I and most of the market are expecting the U.S. Fed to keep its massive QE3 program at its current $85 billion dollar level and not enter into a tapering pattern for the time being. The combination of a sluggish jobs market coupled with the partial U.S. government shutdown are the likely catalysts for postponing the start of a tapering program. If the actual outcome is in sync with the expectations, it will be supportive for equities as well as the broader oil and commodity markets.
Global equities have been trading with a view that QE3 will continue at its current rate. The EMI Global Equity Index increase by 0.28% over the last 24 hours. The year to data gain widened to 3.9% or the highest weekly level so far this year. Global equities have been supportive for oil prices this week.
Tuesday's API report was mixed with a bias to the bearish side. Total crude oil stocks increased more than the expectations by 5.9 million barrels. The API reported a surprise build in gasoline inventories and a larger than expected draw in distillate fuel stocks. Total inventories of crude oil and refined products increased strongly on the week.
The oil complex is mixed as of this writing with WTI lower and the rest of the complex higher 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 0.7 million barrels while distillate fuel stocks decreased by about 2.7 million barrels.
The API reported Cushing crude oil stocks decreased by 2.2 million barrels for the third 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 now show a surplus of 9.5 million barrels while the overhang versus the five year average for the same week will come in around 36.5 million barrels.
I am expecting crude oil stocks in Cushing, Ok to increase modestly for the 3rd week in a row of gains but I am expecting the pace of the building to begin to slow as refiners come back from maintenance as well as Keystone south begins to add line fill ahead of its start up. This will be bullish for the Brent/WTI spread this week.
With refinery runs expected to decrease by 0.2 percent 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 15.5 million barrels while the surplus versus the five year average for the same week will come in around 10.1 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 6.9 million barrels above last year while the deficit versus the five year average will come in around 19.7 million barrels.
The above 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 and bearish for the entire 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. But for the moment the growing surplus is creating a negative umbrella over the market and in particular the WTI contract.
I am maintaining my Nat Gas view at neutral and keeping my bias at 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 higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella