The uncertainty surrounding a European solution to its debt problems by the Oct 23rd summit are becoming more and more in doubt as differences of opinion on the details are emerging. An emergency meeting was held in Frankfurt to try to resolve the differences to no avail. Sarkozy also went to Berlin to meet with Merkel to try to resolve their difference as to how to make the EFSF bailout fund more effective or how to lever it. In addition the IMF and the EU are in a split after the IMF rated the EU projections for Greece as being too optimistic with the IMF now wanting to wait until after the summit before approving the next bailout payment for Greece. With three days left before the summit there are now more differences and disagreements than when the week started. Certainly that is not the definition of progress rather it is just the opposite.
With so many different opinions that are being impacted by nationalism from each member country it almost seems that a long lasting and durable solution is still very far away. Each time a new approach gets put on the table the differences quickly outnumber the areas of agreement. What has transpired so far this week is a perfect example as to why the EU has not solved this problem yet and why it has been lingering for over two years. It does not look like the a solution with all in agreement will emerge from the summit on Sunday. I now would only expect some progress with plans to have more meetings to further discuss the issues with not set date for a final solution. That has pretty much been what it has been going in Europe for two years.
The markets started out the week very optimistically that once and for all the solution will emerge and the problems will be on their way to a resolution and thus the negative impact on all risk asset markets from the EU debt problems would be behind the market. Unfortunately it does not look like it will be done. That said there is still three days left before the summit and if France and Germany can come to some agreement it could serve as a big stepping stone to getting a deal at least almost done. All one can do is continue to watch the follies and hope that some sense of urgency hits all of the key players very quickly. Absent a deal or at least a clear path to a deal by Sunday will likely result in a negative week for risk asset markets next week.
Further in Europe Germany just lowered its 2012 growth forecast from 1.8% to 1% due to the uncertainty in the financial markets. Also contributing to the cloud of uncertainty expanding over the last twenty four hours were the negative comments that came from the US Federal Reserves' Beige book yesterday afternoon. With the economic recovery at a very fragile state it is unfortunate the EU leadership is not out in front in solving the debt issues which would result in a lot more confidence coming back into the global market.
Selling started to emerge yesterday and has carried through Asia and into Europe so far this morning as shown in the EMI Global Equity Index table below. Over the last twenty four hours all ten bourses in the Index lost value resulting in the Index now being down about 1% for the week after being up over 1% earlier in the week. The year to date loss has widened to 17.1% but is still below the 20% bearish market threshold. Global equity markets are currently painting a negative outcome to the EU summit and are thus a negative for oil and the broader commodity complex. The direction of global equities (as well as most all risk asset markets) will be determined by what transpires in Europe over the next three days.
Yesterday's oil inventory report was bullish across the board as inventories declined strongly through the complex. However with the uncertainty surrounding the financial markets (especially in Europe) the fundaments did not play much of a role in price movement on Wednesday or so far today. The bullishness spread across the refined product sector with the biggest decline coming from distillate fuel as production declined and exports increased. Beyond that gasoline inventories declined strongly on the week even as implied demand declined and US refiners seemingly started to switch to a more max distillate production mode (at the expense of gasoline). Crude oil did decline the most in the complex but the vast majority of the decline was a result of a big decline in imports of crude oil which could recover in next week's report. That said the draw in total commercial stocks of almost 11 million barrels was significant, bullish and suggestive that the destocking of US inventories could be accelerating.
The market viewed the report as bullish but did not react much to the report as external factors were weighing on the market pushing the inventory report into the background pretty quickly. The inventory report showed a huge decrease in total stocks, a larger than expected decline in gasoline and distillate inventories along with a surprisingly large draw in crude oil stocks even as implied demand decreased strongly and refinery utilization rates decreased modestly on the week to 83.1% of capacity a decrease of 1.1% in refinery run rates. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
Total commercial stocks of crude oil and refined products decreased on the week by 10.9 million barrels. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 30th week in a row. The year over year deficit widened to 72 million barrels while the overhang versus the five year average for the same week narrowed to 2 million barrels.
Crude oil inventories decreased versus an expectation for a build. With an decrease in stocks this week the crude oil inventory status versus last year is showing a wider deficit of around 27.6 million barrels while the surplus versus the five year average for the same week narrowed to around 2.7 million barrels. PADD 2 stocks declined about 0.4 million barrels on the week while Cushing stocks built by about 0.5 million barrels. Crude oil inventories in this region of the US have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI spread was trading at significantly lower levels. That said the spread has been narrowing for most of this week as tightness in the North Sea is beginning to ease and more Libyan oil is starting to flow.
Distillate stocks decreased versus an expectation for a small decline. Heating oil/diesel stocks decreased by 4.3 million barrels as exports remain robust on the week. The year over year deficit widened to 22.5 million barrels while the five year average overhang switched to a surplus of about 0.4 million barrels. Exports of distillate fuel from the US and in particular from the US Gulf Cost have been steadily growing over the year with the pace of exports accelerating over the last year or so. In fact total distillate fuel exports are still hovering around the 900,000 barrels per day level or almost the equivalent of 25% of US consumption of distillate fuels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season comes in much colder than any of the expectations the current level of exports will likely continue.
Gasoline inventories decreased strongly on the week versus an expectation for a more modest draw. Total gasoline stocks decreased by about 3.3 million barrels on the week versus an expectation for a draw of about 1.0 million barrels. The deficit versus last year widened to 11.9 million barrels while the surplus versus the five year average for the same week switched back to a deficit of about 2.6 million barrels.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have presented an across the board bullish categorization.
Even with WTI still trading above the $85/bbl level I have to move my view back to neutral as it seems as of this writing that the ability for the Europeans to solve their debt issues by the weekend is looking less and less likely. If it is not solved the markets will react negatively. As the market is poised to react based on the outcome in Europe the risk/reward of being in the market is not very favorable. Once the outcome is know there will be ample time to get back in.
I am still bearish and do expect Nat Gas prices to once again move back and follow the downward underlying trend I am also a firm believer that the market is always telling us what to do and how to trade it. I am keeping my guidance at cautiously bearish with a warning signal that we could be setting up for another buy the rumor, sell the fact move tomorrow.
After a pretty decent sell-off on Tuesday Nat Gas futures were able to regain their sea legs and once again defy the bearish odds and end the session in positive territory. As I have mentioned on numerous occasions this week the main event in front of the Nat Gas market is a forecasted bearish inventory injection report that is likely to come in at a level that is more than double the normal five year average for the same week. If that turns out to be the case that is bearish on all fronts and it still surprises me that the market has been able to hold onto any gains at this point in time. What may be happening today is the buy the rumor, sell the fact pattern that has been the dominant pattern for the last two inventory reports may be expected and being played by the market before it even happens. Sounds strange but remember futures markets trade in anticipation of the future and what the event may be and not on the past.
Currently as a new day of trading gets underway in the US markets are modestly higher as shown in the following table.
Dominick A. Chirichella
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