Quote of the Day

Few things are harder to put up with than a good example.
Mark Twain


The correction in oil prices continued for yet another day after the Saudi Oil Minister indicated (yesterday) that OPEC would put more oil into the market in 2011 and prices would not materially change from the range they have been trading in. In other words as I discussed in yesterday's newsletter the Saudi's are starting to become concerned that oil prices may be approaching a runaway mode which is not good for either the consuming world (especially insofar as the global economic recovery is concerned) or the producing world (especially if higher prices result in a slowing of demand). A lot of noise comes out of the various OPEC member countries. However, history tells us that the most important comments that emanate from OPEC members tends to come from the Saudi's as they remain the kingpin within OPEC. They not only control the largest block of oil in OPEC but they also have the largest amount of surplus producing capacity and are in the best position to impact OPEC's strategy more than any other member country. Thus when Saudi Arabia makes comments in the public domain outside of an OPEC meeting it usually is a topic that ultimately has a high probability of coming true.

So on a day when equities were supportive for oil prices and the US dollar was neutral to supportive oil prices still declined as the market viewed the Saudi comments that more oil is likely coming to market and prices will not enter a runaway surge mode anytime soon. In fact the strong selling has continued in overnight trading with oil prices down another 1.5% as of this writing and trading at the lowest level since the middle of December of 2010. Prices have also breached the lower range support level of $87/bbl and if they remain below this level a retest of the major range support level of $83/bbl is very possible.

So far today global equities are mixed as shown in the EMI Global Equity Index table below. The Index is higher by 0.3% for the week so far but the gains have been mostly a result of yesterday's strong moves in the western markets. In overnight trading Asian equity markets were mixed with only Japan showing sizeable gains while European equity markets are muted (the UK FTSE is actually negative at the moment) after data came out showing that the UK economy actually shrunk in the fourth quarter. Fourth quarter GDP fell by 0.5% in the UK versus a forecast for gain of 0.5%. The data suggests that the EU may not be out of the woods just yet.


Today starts the two day US Fed FOMC meeting with most analysts and market participants expecting no major change in the Central Bank's policy although with a few new voting members there could be some new dissenters to the current easy money policy especially with more and more signs (higher commodity prices) that inflation may be the next big worry in the US. Equity markets are not overly supportive for oil prices especially with US equity futures markets currently pointing to a lower opening on Wall Street after almost breaching the psychological 12,000 mark on the Dow Jones Index.

On the currency front the US dollar is back in positive territory and also not very supportive for oil prices or the broader commodity complex. Not only is oil on the defensive this morning gold is taking another big hit to the downside for the fourth trading day in a row. Gold prices are now over 7% below the all time record high hit last month suggesting that the downside correction in the commodity markets are well underway and not yet over. Today's strengthening of the US dollar is mostly being driven by weakness from the other major commodities like the euro and the pound after the less than stellar GDP number out of the UK. However, to the extent that this week's round of US macro economic data comes in strong...especially Friday's fourth quarter GDP number the US dollar may begin to firm more on the fact that the US economy is recovering faster than expected rather than a result of just weakness from other major currencies. In either case the US dollar may not be overly supportive for oil prices in the short to medium term.

With little support likely in the short term from the externals oil participants will be looking at the internals of the market especially the weekly inventory reports which begin to hit the media airwaves this afternoon when the API releases their latest snapshot followed by the market moving EIA inventory report due out at its regular time tomorrow morning. Last week's reports were very disappointing to the market in that they showed an across the board build in inventories and a potential changing of the destocking trend that has been in place for a few months.

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 strong build of about 1.5 million barrels of crude oil inventories mostly as a result of the restart of the Alaska pipeline as well as a modest increase in imports. If the actual numbers are in sync with my projections the year over year surplus of crude oil would widen to 6.7 million barrels while the overhang versus the five year average for the same week will also widen to 18.4 million barrels.


With runs expected to only increase by about 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 2.1 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 surplus is projected to widen of around 2.3 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 turned the corner after going through a decent destocking phase. Gasoline stocks will have built for four weeks in a row if my projection for another build this
week is in line with the actuals.

Distillate fuel likely built by decline modestly by 0.7 million barrels mostly as a result of the colder than normal temperatures we have been experiencing in the eastern half of the US. The latest short term temperature reports are still showing persistent cold temperatures along the eastern half of the US with extremely bitter cold weather hitting this week in many of the large population centers in the eastern half of the US. In fact one private forecaster (Accuweather) is suggesting that cold winter weather may last a lot longer than originally anticipated. 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. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 8 million barrels above last year while the overhang versus the five year average will be around 23.9 million barrels.

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 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 overall view and bias at neutral for oil as the market has lost its upside momentum and is looking like it is now in a corrective move to the downside with the potential to drop all the way to the next range support level of $83/bbl. We are clearly still in a technical and fundamentally driven longer term uptrend.

I am maintaining my Nat Gas view and bias to neutral as the market continues to struggle to hold onto any major gains. With supply still very robust even the colder than normal winter weather conditions do not seem to be enough to send prices into surge mode rather we can expect to see prices remaining in the trading range they have been for months for the foreseeable future. Weather is still one of the main contributors to price direction but the oversupply situation continues to dampen any upside enthusiasm that may come from above normal heating fuel demand.
Currently most markets are in negative territory as shown in the EMI Price Board table below.


 Best Regards,
Dominick A. Chirichella