Quote of the Day
Noting great was ever achieved without enthusiasm.
Ralph Waldo Emerson
Egypt was the main driver of oil prices and most risk assets for the second day in a row. The situation in Egypt is still precarious at best but it has not deteriorated any further versus where the situation was on Friday. There are still no indications that any oil supply through either of the Egyptian transits (Suez Canal or Sumed Pipeline) has experienced any disruptions nor are there any indications that a disruption is imminent. That has not stopped oil prices from surging higher with Brent trading above the key psychological $100/bbl level for most of Monday's trading session and into this morning so far. As a result of the huge overhang of crude oil in the US mid-west WTI is still trading at a significant discount to Brent but well off of the lows it hit on Friday of last week. Irrespective of what else happens the oil complex will be primarily driven by the evolving situation in Egypt until the market is convinced that a bit of stability is beginning to emerge.
At the moment Mubarak is still holding on to power even as the opposition calls for a million person march today. Mubarak has also ordered his newly appointed vice president to engage the opposition group and begin talks. The people still seem highly uninterested in the Mubarak continuing his 30 year reign over the country and as such I still believe that Mubarak has little choice but to eave quietly and let the country move toward a more democratic state...which seems to be the desire of the people at the moment.
Aside from Egypt there is a plethora of macro economic data due out this week in the US with the major market mover...US unemployment rate and the number of non-farm payrolls. This monthly data has proved to be a mover of both equity and oil markets for the last year or so. After last month's disappointing number the forecasters are a bit more conservative in their expectations calling for a job gain of about 160,000 jobs and the headline unemployment rate increasing by 0.1% to 9.5%. This will be a market mover and once the Egyptian situation stabilizes a bit the macro economic data will retake center stage and drive both the financial and commodity markets once again.
In Asian trading hours the latest Purchasing managers Index (PMI) out of China came in a bit lower for January as Chinese government tightening starts to slowly impact this surging economy. The PMI fell to a five month low of 52.9 versus a forecast of 53.5. This has resulted in a modest level of selling in the oil complex as the PMI is a factory or manufacturing indicator and if it is starting to decline it would suggest that oil demand growth in China may also start to slow a bit.
The weekly inventory cycle will get underway today as the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Thursday morning. 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 another strong build of about 2.2 million barrels of crude oil inventories mostly as a result of the industry readjusting inventories after managing end of year stock levels 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 16.1 million barrels while the overhang versus the five year average for the same week will also widen to 21.9 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 1.5 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 3.1 million barrels while the surplus versus the five year average for the same week will narrow to about 8.4 million barrels. Gasoline inventories have turned the corner after going through a decent destocking phase. Gasoline stocks will have built for five weeks in a row if my projection for another build this week is in line with the actuals.
Distillate fuel likely declined 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 most 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. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 7.4 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 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 Egypt 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 overall view and bias at neutral for oil as the market is currently trading around the evolving situation in the Middle East. Absent Egypt oil prices are likely to have remained in a downside correction as they were earlier in the week. Now that the concerns over a supply interruption have moved to the forefront the shorts have been exiting the market since late Thursday and through Monday's trading session. Whether or not the current situation will result in enough new buying to push prices to the next level is still a big question.
As I mentioned above I still think Mubarak will be ousted and some level of stability will come back to Egypt as the country sets it sights on new elections and possibly a very democratic state. Oil flow through Egypt (Suez Canal and Sumed Pipeline) has not been interrupted and I do not think it will. As such unless there is a sudden movement of the protests to other Middle East countries in the short term I think we may be very close to prices having peaked from this event and will likely remain in the trading range for the next few weeks as the situation sorts itself out in Egypt. That said I do not see any aggressive level of selling hitting the oil market anytime soon as geopolitics are now back as a price driver. We are clearly still in a technical and fundamentally driven longer term uptrend.
I am maintaining my Nat Gas view and bias at neutral as the market continues to struggle to hold onto any major gains. With supply still very robust even the advent of another round of colder than normal winter weather conditions may not seem to be enough to send prices into surge mode rather I am still expecting to see prices remaining in the trading range they have been for months for the foreseeable future. Weather is still the main driver of 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 lower as of Asian trading hours as shown in the EMI Price Board table below. So far in Asian trading hours the surge in oil prices to the upside seems to have subsided for the moment on the lower than expected PMI data out of China.
Dominick A. Chirichella