In another clear sign of the slowing of the Asian economy the Reserve Bank of Australian (RBA) cuts its short term interest rate by 25 basis points as it attempts to offset the closing of mines and laying off of thousands of workers. Short term interest rates are now at the lowest level since 2009. Australia is a commodity dependent country with many of those commodities exported to China. With China and most of the developed world continuing to slow commodity consumption is also slowing. The Australian economy is being directly impacted by the slowing of commodity consumption. Australia's action is not only a negative for the Australian currency but a bearish sign for oil demand growth as well as other traditional commodity consumption growth.
On the European front the market continues to watch what Spain will or will not do regarding asking for a bailout. The fact that both sides of this ongoing act continue to try to position themselves prior to a request it creates an atmosphere of uncertainty over the EU sovereign debt issues as well as the EU economy. In addition the Greek situation remains unclear as discussions continue on whether or not Greece will get its next scheduled batch of bailout money. Aside from those issues clouding the EU landscape there is not much else going on in Europe today.
In the US Fed Chairman Bernanke defended his actions with QE3 yesterday in a speech. He basically said QE3 will stimulate growth, cut unemployment and help savers support the US dollar. In my view that is one tall order and one that I still do not see exactly how QE3 is going to do all of that so seamlessly since the US has already had QE1, QE2 and Operations Twist (which is still ongoing) and the US economy is still contracting while unemployment is not improving. Interestingly I would have to say the market is not yet convinced of Mr. Bernanke's claims as there has not been a sustained rally in risk asset markets since QE3 has been announced. It has been a rather tepid reaction in the market. Supporting oil prices a tad was the better than expected ISM factory index (an energy sensitive index) which increased to 51.5 in September which was above the consensus forecasts.
Global equity markets have started to regain some of last week's losses as shown in the EMI Global Equity Index table below. The Index has gained about 0.5% over the last twenty four hours widening the year to date gain to 7.4%. China is closed all week for a holiday. The largest percentage gainer over the last twenty four hours came from the Australian bourse driven by the RBA's surprise reduction in short term interest rates (see above). This has also resulted in some light buying into the first part of The European and US trading sessions. Germany remains on top of the leader board as a relatively weak euro remains a positive for this export driven economy while Hong Kong and the US round out the rest of the top three. Equities have been a positive price driver for oil prices and the broader commodity complex over the last twenty four hours.
On one side of the oil price battle ground or the headwind side the global economy continues to slow as shown by the plethora of macroeconomic data that continues to support this view. However, the negativity associated with the slowing of the global economy is offset somewhat by the significant amount of stimulus, quantitative easing and very accommodating short term monetary policies (like what RBA did overnight). On the other side of the battleground or the tailwind side of the equation the risk of inflation from the accommodative global monetary policies as well as from the possibility that all of the easing will result in an economic growth spurt (still questionable in my view for the short term) is supportive of oil prices as well as the broader risk asset complex. Another supportive price driver for oil prices has been the evolving geopolitics of the middle east... in particular that surround Iran's nuclear program.
Last week Netanyahu in his speech at the UN basically took any military intervention by the Israeli government off of the table until next year. This reduces the risk of an oil supply interruption significantly as military action from either side is very low at the moment. It also opens the door for more time for the sanctions to work and thus possibly bring Iran back to the negotiating table with much more of an open mind. The sanctions are impacting Iran as their main revenue stream (oil sales) is continuing to decrease while their currency is continuing to depreciate in value. For example over the last twenty four hours the Iranian Rial declined another 9% versus the US dollar in open market trading. Iran has economic issues that could create enough instability in the country to force the leadership back to the negotiating table. Only time will tell. But for now geopolitics will move into the background with the global economy and current and medium term oil fundamentals quickly becoming the main price drivers for oil complex.
Today starts the weekly oil inventory cycle with the release of the API inventory report later this afternoon and with the more widely followed EIA oil inventory report being released tomorrow morning at 10:30 AM EST. With the global economy and oil fundamentals becoming more the focus of the trading and investing community this week's oil inventory report could be a price catalyst especially if the actual outcome shows a large deviation from the projections. However, any inventory reaction is likely to be short lived as the main event for this week is still likely to be the markets focusing on the macroeconomics especially the US jobs report on Friday.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to hold relatively steady as the recovery from Isaac is offset somewhat by normal refinery maintenance getting underway. I am expecting a modest build in crude oil inventories, and a small build in both gasoline and distillate fuel stocks. I am expecting crude oil stocks to increase by about 1.5 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 25.7 million barrels while the overhang versus the five year average for the same week will come in around 36 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading around the $19.50/bbl premium to Brent level.
With refinery runs expected to decrease by 0.02% I am expecting only a small build in gasoline stocks. Gasoline stocks are expected to increase by 0.2 million barrels which would result in the gasoline year over year deficit coming in around 18.8 million barrels while the deficit versus the five year average for the same week will come in around 7.9 million barrels.
Distillate fuel is projected to increase by just 0.3 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 29.6 million barrels below last year while the deficit versus the five year average will come in around 24.2 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 in directional sync with this week's projections. As such if the actual data is in line with the projections there will not be a significant change in the year over year inventory comparisons.
On the tropical front just a reminder that the hurricane season is not yet over. The tropics are still quiet with no immediate threats to Nat Gas or oil producing operations in the Gulf of Mexico. However, as I have been mentioning the hurricane season is not yet over and as of this morning there is a tropical weather pattern about 900 miles west-southwest of the Cape Verde Islands. It now has about a 70% chance of strengthening to a tropical cyclone over the next 48 hours. At this point in time the only action is to keep this pattern on the radar to see if it materializes and starts to move toward the US.
Oil has become more reasonably valued after about a 10% downside correction (basis WTI). WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. Both crude oils have bounced off of the lower end of the trading range as support has emerged from the refined products markets as well as from what seems to be a shifting sentiment in Europe. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics has moved toward the background for the short term.
I am keeping my Nat Gas price view at neutral with a bias to the upside as the market continues to react positively to the latest forecast for colder than normal temperature forecast. Event though current prices favor coal over Nat Gas (based on a macroeconomic comparison) the market is now more focused on the upcoming winter heating season and what it may due to Nat Gas demand.
The latest six to ten day and eight to fourteen day temperatures forecasts by NOAA are projecting a large area of the US expected to experience below normal temperatures over the next several weeks. In fact in the mid-west the temperatures are forecast to be strongly below normal. The fact that we are already in the early stages of the so called winter heating season coupled with the aforementioned forecast there has been enough of a change to scare away another layer of shorts as well as attract some medium term or what I would categorize as winter season buyers both from a speculative as well as from a hedging basis. There may also be some cooling related Nat Gas demand along the west coast of the US as temperatures are projected to be well above normal over the next several weeks.
Markets are mixed ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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