Oil bullish ahead of Fed on projected declining stocks

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Marva Collins

The two market moving events today are the weekly EIA oil inventory report and the outcome of the U.S. Federal Reserve FOMC meeting. Certainly the outcome of the Fed meeting has much broader market implications that the weekly oil inventory report, but both could have an impact on the short-term direction of oil prices (NYMEX:CLF14).

The market is mixed as to whether or not the U.S. Fed will announce a tapering program of its massive QE3 stimulus buying that has been adding $85 billion per month to the economy. The U.S. economy has been improving over the last several months but the main question facing the Fed is whether the economic improvement of late is sustainable and will the economy continue to expand enough to continue to lower the still large unemployment problem in the U.S.?

I am still of the view that the Fed will signal that tapering will begin during the first quarter if the economic situation continues to improve. With the U.S. budget deal likely to be passed, the Fed does not have to worry about another partial government shutdown and the negative impact it would have on the economic recovery.

On the fundamental front, the oil market will be looking to see if the large crude oil drawdowns continue in the U.S. The API reported an across the board decline in crude oil stocks late yesterday afternoon with about an 800,000 barrel draw in Cushing stocks. With TransCanada’s 700,000 bpd Keystone Gulf Coast line in the process of filling the pipeline (takes about 3 million barrels) crude oil is already being taken away from Cushing resulting in the inventory situation turning toward a destocking mode after being in a building pattern for a few months.

TransCanada indicated yesterday that they expect the pipeline to begin commercial operations on Jan. 22. With the line fill process having started on Dec. 9, it seems that the process will take about 43 days to fill the line at a rate of about 70,000 bpd. Thus about 500,000 per week will be removed from the Cushing area as part of the line fill process. With refinery runs remaining above the 90% level, this should result in Cushing stocks continuing to decline in the coming weeks. This is a bearish outcome for the spread in the short term.

The Feb Brent/WTI spread has continued to narrow this week after a brief short covering rally on an intraday basis earlier in the week. Although the spread has narrowed a bit further this week, over the last seven trading days the spread has been in a sideways and uncertain pattern with about an equal number of sessions where the spread widened and narrowed. At the moment the short term market bias is for further narrowing.

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