Tuesday Morning March 22, 2011
Quote of the Day
You grow up the day you have your first real laugh at yourself.
Ethel Barrymore
As the Japanese situation showed signs of stabilizing over the weekend and into Monday most risk asset markets moved higher as investor/traders became less fearful of a massive nuclear leak. In addition western coalition forces continued to reduce Gaddafi's capability to destroy his own people putting a bit more upside pressure on oil prices as many participants believe the oil flow out of Libya will be significantly reduced for an extended period of time. In essence the amount of uncertainty in the market place has been reduced enough to bring cash back into most risk asset classes. There is likely a few more trading sessions that will be impacted by the evolving situations in Japan and Libya and then I would expect both financial and commodity markets to start to refocus on the macro economic data that has been the main price driver for most markets.
On the Japan front the Fukushima nuclear facility is still a precarious situation but progress has been made in getting power to the facility and hopefully a restart of some of the water cooling pumps. However, things can change very quickly and if the workers are unsuccessful in getting the temperatures in both the reactors and the cooling pools that house the spent rods radiation will once again begin to seep out into the atmosphere. But for the moment it seems that there are more positives today than just the end of last week.
On the energy consumption front oil products are starting to come to Japan and being offloaded at ports near markets that have essentially run out of gasoline, diesel and kerosene. In addition the flow of LNG, coal and residual fuel continues to work its way to Japan as the country cranks up some of its surplus power generating capacity. Getting power 24/7 to the majority of country in the short term is essential to moving the country into the rebuilding and reconstruction phase as well as getting the many manufacturing industries like autos back up and running once again. According to a report in Bloomberg Japan has about 89% capacity available to produce electricity from coal, oil and nuclear after it lost the rest due to the earthquake and tsunami. About 1,800 power plants operated at about 62.2% of capacity in the fiscal year ending March, 2010 with all likelihood that the power requirements will be about the same in 2011. Thus the country has about 27% of capacity available for ramping up production thus indicating that there is ample producing capacity but the logistics of the grid may tell a different story.
The bombings continued in Libya for the third night in a row. For all intensive purposes the no-fly zone is in place in the most critical regions of Libya and Gaddafi forces have been repelled from attacking the opposition group in Benghazi. Now the coalition forces are looking at expanding the no fly zone over a much wider area of Libya. As I discussed in yesterday's newsletter this is going to be a long and lasting problem in Libya and due to the combination of damaged oil facilities and workers who left the country oil flow will not be returning back to normal levels anytime soon. That said there is still no shortage of oil anyplace in the world and unless the uprising spreads to the greater Middle East and in particular Saudi Arabia there will not be a shortage of oil in the future. The game changer is Saudi Arabia. So far the Saudi monarchy has been able to appease its people with money resulting in the protests being very limited in size and duration. Oil prices have been firm based on the potential for a supply disruption rather than any supply problem at the moment.
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Global equity values have continued to regain value for the third trading session in a row. As shown in the following table the EMI Global Equity Index is up 1.1% on the week so far narrowing the year to date loss to 1.5%. There are still six of the ten bourses in the negative column for the year to date. Canada, the US and China are all bunched up at the top of the winners column with Paris the fourth bourse with gains not that far away from the other three bourses in positive territory. Global equities have been a positive for oil prices for the last several days as the positive correlation between global equities and oil prices is slowly retuning back to normal as events like Japan and Libya are slowly starting to lose their impact on the markets.
With the events well priced into the market already this week's round of inventory reports may matter as to the short term direction of oil prices as the weekly inventory cycle will gets today as the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Wednesday morning. My projections for this week's inventory reports are summarized in the following table. I am expecting another mixed report with a modest build in total commercial stocks of crude oil but a decline in refined products inventories as refinery runs likely declined marginally on the week. I am expecting crude oil stocks to build by about 1.9 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil would come in at just 1.2 million barrels while the overhang versus the five year average for the same week will be about 15 million barrels.
With runs expected to decrease by about 0.2% and with imports expected to hold steady I am expecting a decent decline in gasoline stocks. Gasoline stocks are expected to draw by about 1.8 million barrels which would result in the gasoline year over year surplus switching to a deficit of around 1.4 million barrels while the surplus versus the five year average for the same week will narrow to about 3.1 million barrels.
Distillate fuel is projected to decrease modestly by 1.2 million barrels on a combination of some weather demand as well as a decline in production. The latest NOAA weather forecasts are now showing a significant portion of the US expected to experience below normal temperatures for the next several weeks. The forecasts are a positive for heating oil especially after the last several weeks of bullish inventory reports.
In spite of the forecast for cooler temperatures it is now spring and low temperatures are not nearly as severe as they are n the ehart of the winter and as such I do not expect any large increase in heating oil consumption that would result in a very above normal draw from inventory. If so the inventory building season may get a bit of a jumpstart in starting to replace the volume consumed this year. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 6 million barrels above last year while the overhang versus the five year average will be around 23.1 million barrels.
Net result the US continues to remain well oversupplied of just about everything in the oil complex with supply expected to remain robust for the foreseeable future. The major wild card for distillate fuel over the next three to six months will be how much additional diesel fuel is going to be required by Japan. It is likely that Japan's import requirements for diesel fuel will increase strongly once the nuclear situation is stabilized and the country enters into the rebuilding and reconstruction phase especially with a large percentage of the refining capacity in Japan shut in.
As usual do not overreact to the API data which will be released late today as more often than not it is 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 bearish as total commercial stocks of crude oil and refined products combined are likely to have increased 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 with the evolving situation in North Africa and the Middle East as well as in the financial markets and how much the macro issues will offset any of the individual micro drivers like supply & demand.
My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my bias at cautiously bullish as the market is still focused on the geopolitics of North Africa and the Middle East. I am leaving my view at neutral for the moment as I think we could see a bit of easing in oil prices in the short term but we are once again in the mode of buying the dips as a strategy that will likely have the highest probability of success.
I am maintaining my Nat Gas view and bias to cautiously bullish as Nat Gas prices broke out of the trading range it has been in since January. The price of Nat Gas surged higher on Thursday after a bullish inventory report and is now trading above the upper end of the trading range that has been in place since January. If prices remain above this level the next technical resistance level will be around the $4.30/mmbtu level.
Currently asset classes are mixed as shown in the EMI Price Board table below.
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
