In what I have been viewing as the oil complex starting to put in a technical bottom the spot WTI contract has now increased for the second week in a row. Support from the external price drivers (currencies & equities) as well as a surprisingly large 1.5 million barrel draw from Cushing crude oil inventories this week were some of the highlights that are continuing to mitigate a collapse in oil prices. Even with a Cyprus sell-off underway as of this writing oil is currently off only 0.6 percent. The spot WTI contract has been moving higher for the last week or so since bottoming just below the $90/bbl level. The spot Brent contract has been trading in more of a sideways trading range over the last week but it is also showing signs of trying to form a technical bottom. News that the North Sea Oseberg field experienced a power outage and a gas leak provided fundamental support for Brent. With the North Sea running at normal production levels this new unscheduled interruption is now something to watch closely.
On the refined product front both the spot RBOB and HO contracts have been trading in a sideways range over the last week or so. The spot HO contract looks like it is forming a double bottom technical pattern while the RBOB contract appears to be slowly moving above its current resistance level. The RBOB contract has been volatile as ethanol blending limitations have caused ethanol RINS to skyrocket. Overall the entire oil complex has moved away from the strong downside correction that was in play from mid-February to early March. Since then the market has stopped falling with WTI taking the lead and not only bottoming but actually rising moderately.
The big event over the weekend that could potentially have an impact on the short term direction of most of the external market price drivers was the very surprising bailout deal conditions imposed on Cyprus. In a change from previous bailout deals the EU and IMF wants Cyprus bank depositors to take up to a 9.9 percent hit on their savings in return for the 10 billion euro aid package. The deal announced in the early morning hours on Saturday sent many people to get as much cash as they could out of the banks via ATMs as the banks were closed and electronic transfers were blocked.
The deal has to be approved by the parliament. According to the President of Cyprus if it fails Cyprus's two largest banks will collapse. So the story is far from over as the parliament does not vote until Monday. Having the bank depositors take a hit on their savings has not been a condition in any other EU bailout. However, the EU said it was the only way to salvage Cyprus's financial sector. They also said it would not set a precedent. As of Sunday night's open in the US it would seem the market does not believe that last statement as traders and investors have come out with mostly nothing other than sell orders. Equities and most commodities are lower while gold and bonds are higher as cash looks for a short term safe haven.
An important week on the economic front with a modestly active calendar of macroeconomic indicators with the big event in the US this week coming mid-week when the US Central bank FOMC committee meets. The market will be parsing every word of the outcome announcement on Wednesday to see if there is any sign that the Fed's appetite for its massive quantitative easing program is changing in anyway after the better than expected jobs data reported for the month of February. The Fed and Chairman Bernanke have continued to say they would maintain a very accommodative monetary policy as long as the unemployment rate remains above 6.5 percent (currently at 7.7 percent) and inflation remains below 2 percent. Last week the CPI came in higher than expected but still it is only at 0.7 percent and below the threshold. I do not expect anything other than status quo from the FOMC this week.
The oil complex ended the lower across the board except for WTI which gained on the week. The spot WTI contract gained ground on a combination of support from the externals as well as the draw in Cushing crude oil stocks. Toward the end of the week reports of a production interruption in the North Sea Oseberg field helped prop up Brent prices... but not enough to erase all of the declines from earlier in the week.
WTI increased while Brent declined resulting in a strong narrowing of the spot Brent/WTI spread on the week. The spot WTI contract increased by 1.63 percent or $1.50/bbl while Brent declined by about 0.37 percent or $0.41/bbl. Crude oil stocks in PADD 2 increased but Cushing stocks fell strongly even as the Seaway pipeline remains constrained and refinery maintenance season is still underway.
The May Brent/WTI spread was lower for the fourth week in row. The May spread declined by 10.73 percent or $1.91/bbl. It is now trading below the level it was at just prior to the announcement of the Seaway pipeline bottleneck at the end of January. The spread was in a narrowing trend until the announcement hit reversing the direction and sending the spread higher by about $6/bbl. The spread has been declining since the third week of February with the decline slowed on Friday on a round of short covering on news of the Oseberg production interruption.
I expect the spread to slowly continue to decline with the decline accelerating once the spring refinery maintenance season is over and crude oil demand returns to more normal levels. At the moment it appears that Cushing is entering into the early stages of a destocking trend. If this continues it will certainly add pressure on the Brent/WTI spread. However, we have to watch the Oseberg production issue to see if last Thursday's interruption is long lasting. If it is it could quickly turn the spread back into a widening pattern until North Sea production returns to normal levels.
On the distillate fuel front the Nymex April HO contract decreased by 1.21 percent or $0.0359/gal on the week as distillate fuel inventories were about unchanged on the week even as temperatures were winter like over parts of the US during the report period. Distillate was about tied with gasoline as the largest percentage loser in the oil complex for the week. Gasoline prices decreased modestly even with a larger than expected draw in inventories last week. The April Nymex gasoline price decreased by 1.24 percent or $0.0397/gal this past week.
The April Nat Gas futures contract increased strongly by 6.7 percent or $0.243/mmbtu on the week and is now setting up for a test of the technical and psychological $4/mmbtu level.
Nat Gas inventories did not disappoint the bulls showing a larger than expected net withdrawal. The spot futures contract just blew through to technical support levels last week and is now setting up for a test of the technical and psychological $4/mmbtu level. The last time Nat Gas futures traded at $4/mmbtu was in the middle of September of 2011. Hitting the $4/bbl level also represents a doubling of the futures price since bottoming a tad below the $2/mmbtu level in April of 2012.
How long the market will continue in the current upside rally is still a question. Inventory withdrawals will be winding down over the next several weeks. Although the latest NOAA weather forecasts are calling for below normal temperatures across major portions of the US through the end of March. March is going out like a lion this year. As we move into April the focus will switch to the upcoming summer cooling season. Unless the temperatures are hotter than normal Nat Gas prices are going to struggle to continue to significantly higher levels. Also as the price of Nat Gas rallies the economics of moving drilling rigs back toward the Nat Gas sector is going to increase which will ultimately result in yet another bump up in Nat Gas production.
Thursday's EIA report was bullish across the board and from all viewpoints. The report showed a net withdrawal that was above the expectations as well as above both last year and the five year average net withdrawal for the same period. Thus the number was also bullish based on a comparison to the historical data. The 145 BCF withdrawal (above normal for this time of the year) was above the market consensus calling for a withdrawal of around 134 BCF. The draw of 145 BCF was greater than my model forecast (-120 BCF withdrawal) this week. The year over year inventory situation remains in a deficit position versus last year and has widened this week while the surplus versus the more normal five year average has narrowed. The current inventory surplus narrowed to 198 BCF above the five year average or about 11.4 percent above.
On the financial front equity markets around the world were mostly lower giving back some of the previous week's gains. The EMI Global Equity Index is still showing a year to data gain of 1 percent after losing 1.2 percent last week. Global equity markets were a negative price driver for the oil complex last week.
The euro was higher on the week while the US dollar was lower driven mostly the ECB not reducing rates and positive comments for ECB head Draghi. Also the USD was pressured on a view that QE will continue on a large scale basis in the US. Last week the global equity markets were a negative price driver for oil and most commodity markets.
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.
Markets are mostly lower heading in the Asian trading session as shown in the following table.
Note: Due to my travel this week I am publishing Monday's report on Sunday night.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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