The oil complex ended the day in negative territory with the exception of the spot WTI contract which ended the day with a modest gain. The main feature in the oil complex was the strong narrowing of the Brent/WTI spread. The April spread narrowed by about a $1/bbl today. On a continuation chart basis the spot spread is currently at the same level (about $17/bbl) that the spread was trading at just prior to the announcement of the Seaway bottleneck issue. Cushing stocks have been in a topping pattern and could be entering into a destocking pattern.
The spread was in a narrowing pattern when the Seaway announcement hit reversing the trend and pushing the spread higher by about $6/bbl in a short timeframe. That has now all been eliminated with the spread now looking like it is ready to resume its downtrend and continue the process of the spread working its way back to a more normal historical trading level. This will be a slow process and much like the interruption that happened with Seaway there will be other events that could temporarily derail the process. The API just reported a draw of about 600,000 barrels at Cushing storage... which is bearish for the spread.
Global equities seem to be taking a rest from last week's strong upside rally. So far the EMI Global Equity Index is lower by about 0.2 percent for the week with the year to data gain narrowing to 2.1 percent. Japan remains on top of the EMI leader board with two other bourses also showing double digit gains for the year... the US Dow and London with Australia very close showing a 9.9 percent gain for the year. This week the global equity markets have been mostly a neutral price driver for the oil complex as well as the broader commodity complex.
Today the EIA released their monthly Short Term Energy Outlook with no change in their projection for 2013 oil demand growth compared to last month's report. This morning OPEC released their report and also kept their forecast for 2013 oil consumption the same as last month's report. Following are the highlights of the EIA report.
• Oil market balances have not changed dramatically since last month's STEO, although somewhat lower expectations for production in Libya and Iraq, along with an increase in unplanned outages in countries outside the Organization of the Petroleum Exporting Countries (OPEC), implies slightly tighter conditions in 2013 than previously projected. Positive economic indicators, including upward revisions in estimates of Chinese GDP growth and continuing employment growth in the United States, could lend support to higher prices, but over the past week they have been counterbalanced by renewed uncertainty regarding economic growth in Europe.
• EIA estimates that global liquid fuels consumption outpaced production in January and February 2013, resulting in a 1.1-million-bbl/d average draw in global oil stocks. Projected world liquid fuels consumption grows by an annual average of 1.0 million bbl/d in 2013 and 1.4 million bbl/d in 2014. Countries outside the Organization for Economic Cooperation and Development (OECD) drive expected consumption growth. Projected world supply increases by 0.8 million bbl/d in 2013 and 1.9 million bbl/d in 2014, with most of the growth coming from North America and other non-OPEC countries.
• Non-OECD Asia is the leading regional contributor to expected global consumption growth. EIA expects refinery crude oil inputs in China to be bolstered in 2013 as oil product inventories are restocked and new refining capacity comes on line. EIA estimates that liquid fuels consumption in China increased by 380,000 bbl/d in 2012, and will increase by 450,000 bbl/d in 2013 and by 510,000 bbl/d in 2014. This compares with annual average growth of 540,000 bbl/d from 2004 through 2010.
• OECD liquid fuels consumption fell by 0.5 million bbl/d in 2012. EIA projects OECD consumption to further decline by 0.3 million bbl/d in 2013 because of declining consumption in Europe. OECD consumption flattens in 2014 as European consumption begins to recover in response to higher economic growth.
• EIA projects non-OPEC liquids production will increase by 1.2 million bbl/d in 2013 and by another 1.4 million bbl/d in 2014. North America accounts for almost three-quarters of the projected growth in non-OPEC supply over the next two years because of continued production growth from U.S. tight oil formations and Canadian oil sands.
• OPEC member countries, particularly Saudi Arabia, cut production heavily in fourth-quarter 2012, which contributed to an increase in crude oil prices at the start of 2013. EIA estimates suggest that Saudi Arabia cut production from an average of 9.9 million bbl/d during third-quarter 2012 to 9.0 million bbl/d in February 2013.
• EIA estimates that OECD commercial oil inventories at the end of 2012 totaled 2.69 billion barrels, equivalent to 58.4 days of supply. Projected OECD oil inventories fall slightly and end 2013 at 2.63 billion barrels (56.7 days of supply). Inventories increase to 2.66 billion barrels (57.7 days of supply) by the end of 2014.
Tuesday's API report was bullish across the board starting with a surprise draw in crude oil and larger than expected draws in both gasoline and distillate fuel as refinery runs declined more than anticipated. Total crude oil stocks decreased by 1.4 million barrels versus an expectation for a modest build. Gasoline showed a draw in inventory as did distillate fuel stocks. The API reported a 1.4 million barrel draw in crude oil stocks versus an industry expectation for a modest build of around 2 million barrels as crude oil imports decreased while refinery run rates decreased strongly by 1.8 percent. The API reported a modest draw in distillate and in gasoline stocks.
The API report was bullish across the board. The oil market is still mostly lower (except WTI) heading into the Asian trading session and ahead of the EIA oil inventory report tomorrow at 10:30 AM today. 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. The API reported PADD 2 stocks built by around 300,000 barrels while Cushing stock decreased by 0.6 million barrels. On the week gasoline stocks decreased by about 3.1 million barrels while distillate fuel stocks decreased by about 2.2 million barrels.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to decrease as more refineries move into maintenance mode. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was winter like over the east coast... and a draw in gasoline stocks during the report period as refinery runs continue to decline ahead of US maintenance season.
I am expecting crude oil stocks to increase by about 2 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 32.8 million barrels while the overhang versus the five year average for the same week will come in around 49.1 million barrels.
I am expecting a draw in crude oil stocks in Cushing, Ok and in PADD 2 even as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be bearish for the Brent/WTI spread. In addition with the North Sea operating normally any modest decline in Cushing stocks should move the spread lower from current levels.
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 1.4 million barrels which would result in the gasoline year over year deficit coming in around 1.6 million barrels while the surplus versus the five year average for the same week will narrow to around 0.8 million barrels.
Distillate fuel is projected to decrease by 1.7 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 16.1 million barrels below last year while the deficit versus the five year average will come in around 20.2 million barrels.
The following 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 mostly in directional sync with this week's projections.As such if the actual data is in line with the projections there will be only small changes in the year over year inventory comparisons for just about everything in the complex.
I am maintaining my view of the entire complex at neutral as the oil complex appears to still be in the process of forming a short term technical bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.
I am maintaining my view to cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.
Nat Gas futures continue to trade above the $3.50/mmbtu breakout area (now support) suggesting that the market may be in the early stages of a new leg to the upside. The futures market was quiet on Tuesday as the industry awaits Thursday's EIA inventory report. If the market is able to get through the $3.66/mmbtu resistance level the next upside testing area would be around the $3.75/mmbtu level. From a technical perspective the Nat Gas futures market remains in an uptrend that has now been in play since bottoming in mid-February.
Markets are mixed heading in the Asian trading session as shown in the following table.
Note: I am publishing Wednesday's report on Tuesday night due as I will be teaching a course starting early on Wednesday.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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