Cautiously bearish on oil

Weekly energy market analysis

The oil complex staged a modest rally yesterday led by WTI (NYMEX:CLJ14) as Brent (NYMEX:SCJ14) lagged the rest of the complex higher after holding stable last week while the rest of the complex was under strong selling pressure. WTI received a boost from an announcement by Enterprise Products Partners that the Seaway crude-oil pipeline is slated to begin operating in late May or early June. An executive told analysts on March 18 the 450,000-barrel-per-day twin pipeline that runs parallel to the current 400,000 bpd pipeline would start up in the second quarter. In July, the company's 96-mile (154 km), 784-bpd from ECHO to Beaumont and Port Arthur will also start up to serve refineries in those areas, Mallett said.

Simply put Cushing inventories are going to continue in a destocking pattern for the foreseeable future. Between the Keystone Gulf Coast Pipeline line and the new Seaway addition 1.125 million barrels per day of outflow pumping capacity will be available to move crude oil out of Cushing over and above the existing outflow routes. I do not expect a surplus of crude to develop on the Cushing area for the short to even longer term.

Prices in the oil complex are trading in negative territory ahead of this morning’s EIA oil inventory report. Last night’s API oil report showed a much larger than expected build in crude oil stocks and a modest draw in Cushing inventories. The evolving situation in the Ukraine is still creating a cloud of uncertainty over oil and most risk asset markets now that Crimea is part of Russia.

In addition to this morning’s EIA fundamental snapshot the US Federal Reserve FOMC meeting outcome will be announced early this afternoon. The market consensus is expecting a status quo outcome from the new Chairman’s first meeting. Interest rates will remain unchanged and at a very low level while the tapering of the QE3 bond buying program is likely to decrease by another $10 billion starting April 1. If this is the outcome the QE 3 bond buying program will decline to $55 billion in the month of April and $30 billion below the peak level of the program.

Global equity market gained ground over the last 24 hours as the Crimea situation became clear. The EMI Global Equity Index increased by 0.95% off a strong performance in the Brazilian stock market. The EMI Index year to date loss has narrowed to 6% as the Paris bourse joined Canada in the positive column for 2014. Japan is now the worst performer for the year with Brazil a close second. The US Dow is still in negative territory for 2014 but has pared its losses over the last several days. Equities were a positive price driver for the oil complex and the broader commodity markets but was offset partiality by an upward move in the US Dollar Index.

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