The evolving geopolitical situation surrounding the Ukraine is continuing to keep oil prices well bid in spite of a bearish fundamental data point in last night’s API inventory report as well as mediocre data out of China. Although oil is not currently an issue in the Ukraine the escalation of this situation could result in new tighter sanctions against Russia which could in fact impact the flow of oil out of Russia… one of the largest exporters in the world. The market has been slowly building in a risk premium associated with this situation lasting considerably longer and possibly turning into round two of the cold war between Russia and the U.S.
On the other end of the world the latest data hitting the media airwaves out of China was mediocre but better than expected. China’s economy expanded at the weakest pace in the last year and a half as the main economic growth engine of the world seems to be on a path of missing their 2014 objective of 7.5 percent GDP growth target. GDP increased by 7.4 percent in Q1 compared to a year earlier. The headline GDP number was slightly above the market expectations of 7.3 percent growth.
The slowest growth rate in the last year and a half is starting to impact oil consumption in China as most of the indicators are currently suggesting that the number one oil demand growth engine of the world may not hit the growth targets recently forecast by the three main oil forecasting agencies … IEA, EIA and OPEC.
Overall the latest out of China is biased to the bearish side for oil adding to the bearish snapshot from the API data yesterday. The API data (see below for a more detailed discussion) reported a 7.6 million build in crude oil stocks with a 640,000 barrel draw out of Cushing. The more widely followed EIA data will be released at 10:30 AM this morning. There is ample crude oil available in the world with no indications of a shortage anywhere.
In addition the first cargo from Libya (since the deal last week) is ready for loading at the port of Hariga. The ship is scheduled to load today and then exported to Italy. The 1 million barrel cargo may be the beginning of a very slow return of Libyan oil returning to the marketplace.
The WTI (NYMEX:CLK14) contract is certainly getting a boost (especially relative to Brent) due the draw in crude oil stocks in Cushing. Cushing stocks have declined close to 15 million barrels since January but the total level is still about 5 million barrels above the pre-surplus five year average. Cushing is quickly becoming part of the US Gulf region and not simply a standalone location. Oil can now easily flow into and out of the region.
There is no reason for concern over the destocking of crude oil in Cushing as what has been removed from Cushing is simply part of the surplus that has accumulated and is un-needed to meet normal operating requirements of the region. The forward curve remains in a backwardation suggesting inventories should be reduced even further as the industry looks for a stable operating level for the region… which I estimate to be around 21 to 22 million barrels.
The June Brent/WTI spread is narrowing slightly in overnight trading on the API reported draw in Cushing stocks. The spread is currently trading in the middle of its technical trading range of $5/bbl on the support side and about $7/bbl on the resistance end. I continue to expect the spread to return to its pre-surplus normal trading level of WTI trading at a small premium to Brent. However the path to normalization is likely to be choppy during the spring refinery maintenance season in the US.
Global Equities were mostly higher around the world but the EMI Global Equity Index was dragged lower from a strong decline in the Brazilian market. The EMI Index declined by 0.29 percent widening the year to date loss to 2.4 percent. Japan staged a strong rally on a continuation of stimulus and on better than expected GDP data out of China. Japan still remains the worst performing bourse in the Index with Canada continuing to hold the top spot on strong oil prices. Global equities were a mixed price driver for the oil complex over the last twenty four hours.
Wednesday's API report was biased to bearish side as total crude oil stocks increased strongly while refined product inventories were lower. The data is reflective of normal operation of the Houston Ship Channel during the report week. Crude oil imports into the US increased by 182,000 barrels per day with refined product exports from the US likely increasing from the Gulf region. Total inventories of crude oil and refined products combined were higher on the week.