“You might be disappointed if you fail, but you will be doomed if you don't try.”
The rally in commodities and financial instruments continued for another session on Tuesday even as volumetric activity began to decline. The prospects for the economic recovery to continue...especially in the developed world has been enough to bolster the market sentiment. The externals, equities and the US dollar, have been mostly supportive for oil prices as well as the broader commodity complex. On top of the support coming from the financial sector, oil fundamentals have become a supporting factor of late as supply, demand and inventories continue to work their way back toward more normal or pre-recession levels. The API oil inventory report released late yesterday afternoon was mostly supportive for prices (see more details below). From a technical perspective WTI is now hovering near its technical breakout level above the $90/bbl resistance level and following the gasoline price breakout from a few days ago. For the moment, all signs point toward oil prices slowly gaining ground, especially if the buy and hold investor sector begins to deploy cash into oil and other commodities as they have done most time over the last four or five years at this time of the year.
Late yesterday afternoon the API released their latest inventory assessment. The API released a mostly bullish inventory report. The API showed a large decline in crude oil and gasoline stocks with not much of a change in distillate fuel inventories. The API reported a crude oil inventory draw of about 5.8 million barrels even as refinery utilization rates declined by 0.7% to 85.4% of capacity They also showed a strong draw in gasoline stocks of about 2.9 million barrels while distillate fuel stocks were about unchanged from the previous week even at a time when the weather in the main heating oil consuming part of the US was the coldest of the season so far. The results of the API report are summarized in the following table. So far the reaction to the API report has been marginally positive as prices have continued to increase in overnight trading. In fact if today’s EIA report is in sync with the API report it could result in a strong push to the upside especially if he US dollar remains in negative territory as it is as of this writing.
My projections for this week’s inventory reports are summarized in the following table. I am expecting a mixed report for US oil stocks. I am expecting a modest decline of about 1.2 million barrels of crude oil inventories as refiners continue to manage their yearend inventory levels. If the actual numbers are in sync with my projections, the year over year surplus of crude oil would narrow to 17.3 million barrels while the overhang of the five-year average for the same week will also narrow to 26.6 million barrels. The overhang is slowly dissipating in the US as the direction of stock levels remains supportive for prices.
With runs expected to decrease by only 0.1% and with imports expected to increase a bit, I am expecting a modest increase in gasoline stocks. Gasoline stocks are expected to build by about 1.2 million barrels even as refiners continue to focus their attention to the colder than normal winter heating season that has been in play so far. This week the gasoline year-over-year deficit is projected to narrow to around just 0.4 million barrels while the surplus versus the five-year average for the same week will widen to about 9.1 million barrels. Gasoline inventories have staged a decent recovery (recovery defined as destocking) as the overwhelming surplus situation that persisted throughout the entire summer driving season has virtually been eliminated with the overhang versus the five-year average very manageable at this point in time. However, over the last few weeks gasoline stocks have once again began to build suggesting that the overhang may linger longer than expected and the sudden fundamental surge in prices discussed above may dissipate sooner rather than later.
Distillate fuel likely drew by about 0.7 million barrels as economy sensitive diesel fuel implied demand continues to remain steady and as the start of the winter heating season has gotten underway with a cold spell. The latest 6 to 10 day and 8 to 14 day NOAA temperature reports are still showing a large portion of the eastern half of the US likely to be engulfed in colder than normal temperatures for the rest of December. With the temperature forecasts projected to be colder than normal for the next few weeks we could very well see HO net withdrawals starting to accelerate in the not too distant future even as the temperatures ease a bit. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 0.7 million barrels below last year while the overhang versus the five-year average will widen to 24.5 million barrels.
As usual do not overreact to the API data as the EIA report is due out in a few hours and be cognizant that the API report is often not in line with the more widely followed EIA data. If the EIA report is within the projection, I would expect the market to view the results as modestly bullish as total commercial stocks of crude oil and refined products combined are likely to have decreased for yet another week. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets and how much the macro issues will offset any of the individual micro drivers like supply & demand.
My individual market views are detailed in the table at the beginning of the newsletter. I am maintaining my cautiously bullish view for oil but with a big caution flag as the market is not only being influenced by the macro economic data of late but we are now in the end of the year book-squaring mode that could result in additional profit taking selling in the complex as well as a high level of volatility as liquidity begins to decline heading into next week’s trading.
I am maintaining my Nat Gas view as neutral as I believe the market will remain within the existing trading range for the near term or unless the next phase of winter weather turns out to be much colder than normal. The weather – the main price driver – continues to be projected to be a bit less threatening going forward as the bitter cold seems to be easing. With supply and demand balances still very robust, even a return to normal winter weather conditions will not be enough to keep prices firm going forward. There is not much more out there to impact Nat Gas prices in either direction with weather still the sole contributor to price direction.
I continue to raise the caution flag as we are in the end of the year holiday trading environment which will result in a very quick decline in volumetric activity and thus susceptibility to wide intraday trading ranges with less than normal day to day market changes. It is also a time of the year where we can see unexpected moves in either direction on low liquidity trading that may or may not be of significance to the market when the full complement of trader/investors return back to their trading desks on Jan 3nd.
Currently most risk asset classes are in positive territory as shown in the EMI Price Board table below.
Dominick A. Chirichella
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