Once again concerns over the slowing of the global economy have pushed most global risk assets markets lower in overnight trading. Australia reported a cut in payrolls in June with the jobless rate rising suggesting that the Australian Bank may now be readying for the fifth interest rate cut in the last nine months. South Korea lowered short term interest rates overnight as Central Banks around the world try to stay ahead of the slowing of the global economy. Tomorrow the main economic and oil demand growth engine of the world ...China...will release their latest snapshot of GDP. The market is expecting GDP to grow at a rate of about 7.7% for the second quarter versus 8.1% for the previous quarter.
Yesterday the FOMC minutes were released from the June US Fed meeting. The market was a tad disappointed as the minutes did not reveal anything that was not already know from Bernanke's presser right after the meeting insofar as whether or not the Fed is leaning toward a new round of quantitative easing. The outcome of the macroeconomic data over the next several weeks will likely play a role in the Fed's decision making process at the upcoming August meeting in Jackson Hole.
The performance of the global economy is weighing on the performance of global equity markets as shown in the EMI Global Equity Index table below. The Index is now lower by 2.6% for the week widening the year to date loss to 1.4%. Five of the ten bourses in the Index are now back into negative territory for the year a sign of the growing negative sentiment that is forming around the world. As a leading indicator equities are suggesting that the growing malaise in the global economy is likely to persist for an extended period of time. Declining equities portray a slowing global economy and thus a slowing of oil demand growth as well as other traditional commodities. Equities are a negative for oil as well as the broader commodity complex.
The International Energy Agency just released their monthly oil market report and unlike the EIA they forecasted a slightly more optimistic view for oil demand growth in 2013 projecting a growth rate of about 1.1 million bpd versus he EIA projection for 700,000 bpd in 2013. With the way the global economy is evolving I view the EIA projections as more likely to be the case going forward. Following are the highlights of the IEA report.
Muted economic recovery in 2013 supports a 1.0 mb/d rise in oil demand to 90.9 mb/d. While stronger than the estimated 0.8 mb/d gain envisaged for 2012, growth remains well below the pre-credit crunch trend. Non-OECD demand overtakes that expected for the OECD in 2013, with 2Q13 the potential inflection point.
Rising volumes of North American and Brazilian supply should support non-OPEC growth near 0.7 mb/d in 2013, to average 53.9 mb/d. This is after unplanned outages in 2011 and 2012 reduced growth to just 0.2 and 0.4 mb/d, respectively. OPEC NGLs output averages 6.5 mb/d next year, after growth of 0.4 mb/d in 2012 and 0.3 mb/d in 2013.
Following relatively weak 2011 refinery capacity growth, 2012 sees net additions of over 1 mb/d of distillation, with a further 1.3 mb/d in 2013, exceeding demand growth and potentially capping refining margins. Upgrading and desulphurization additions are a combined 2.6 mb/d and 2.8 mb/d this year and next, amid higher fuel quality standards.
OPEC June crude supply was close to recent highs at 31.8 mb/d, ahead of incoming US sanctions and an EU oil embargo on Iran. The 'call on OPEC crude and stock change' rises to 31.2 mb/d in 3Q12, easing to average 30.5 mb/d during 4Q12-4Q13. Installed 2013 OPEC crude capacity rises by only 250 kb/d to 35 mb/d, as assumed decline in Iran partly offsets gains elsewhere.
OECD industry oil stocks rose by 15.4 mb in May, to 2 672 mb, lagging a five-year average build of 25.1 mb. Forward demand cover fell by 0.8 days to 58.9 days from April, albeit still 1.4 days above the five-year average. Preliminary data indicate a 7.2 mb decline in June OECD industry inventories, in contrast with a five-year average 2.3 mb build.
Oil futures were volatile over June and early July, amid conflicting pressures on prices. Benchmark crudes mostly plummeted in June after worsening euro zone woes and with a backdrop of rising global inventory. Prices reversed course towards end-June and into early July, with benchmark WTI last trading around $85/bbl and Brent at $99/bbl.
Wednesday's EIA inventory report was mostly bearish after a modest increase in total stocks, a surprisingly large build in distillate fuel stocks along with a larger than expected build in gasoline stocks but offset a tad by the larger than expected draw in crude oil inventories. Total implied demand decreased strongly for the with distillate fuel demand leading the way lower. Refinery utilization rates increased modestly on the week to 92.7% of capacity an increase of 0.7% in refinery run rates as refiner's continue to work off some of the surplus crude oil and replenish refined product inventories. 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 increased by 2.9 million barrels after decreasing modestly the week before. The year over year surplus narrowed to 31.1 million barrels while the surplus versus the five year average for the same week narrowed to 40.6 million barrels. By all measurements total oil supply in the US is still well balanced to comfortable irrespective of the evolving geopolitical risk in the Middle East.
Crude oil inventories decreased (by 4.7 million barrels) versus an expectation for a more modest draw. Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. Even with a decrease in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 22.7 million barrels while the surplus versus the five year average for the same week came in around 37.8 million barrels. Crude oil imports also declined strongly for the second week in a row. We could see a larger than expected increase in imports in next week's inventory report.
PADD 2 crude oil inventories decreased by about 0.5 million barrels while Cushing, Ok crude oil inventories decreased by 0.8 million barrels on the week. Crude oil inventories in the mid-west region of the US are still hovering near record high levels even as the Seaway pipeline is now pumping oil out of the region as well as an increase in refinery run rates. The decrease in crude oil inventories from the region this week is bearish for the Brent/WTI spread.
Distillate stocks surged versus an expectation for a modest seasonal build. Heating oil/diesel stocks increased by 3.1 million barrels. The year over year deficit came in around 24.1 million barrels while the five year average remained in a deficit of about 22.1 million barrels. The major reason for the underperformance in distillate inventory pattern this year has been the growing level of exports.
Gasoline inventories increased modestly and above expectations for a smaller build in stocks as the summer gasoline driving season is now at its height. Total gasoline stocks increased by about 2.7 million barrels on the week versus an expectation for a modest build. The deficit versus last year came in at 4.0 million barrels while the deficit versus the five year average for the same week was about 5.3 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 a mixed categorization on the week as everything in the complex increased on the week except for crude oil which declined more than expected. Overall this week's report was biased to the bearish side.
I still think the oil price is overvalued especially after last Friday's huge increase. However, the combination of the evolving geopolitical concern around Iran and the Middle East as well as the view that the global Central Banks are more likely to ease monetary policies further as well as initiating a new round of stimulus should contribute the market stabilizing (after some profit taking selling). For the moment the oil complex is trying to establish a new trading range.
I am keeping my view at neutral as the hot weather that has persisted across major portion of the US has subsided a bit and the rest of July is not likely to be as hot over the entire US as it was for the second half of June. In addition the economics of coal switching now favors coal which will result in a reduction in Nat Gas demand. Finally Nat Gas at current price levels is overvalued and is likely to decline further and settle into the $2.25 to $2.70 trading range.
This week I am projecting the sixteenth net injection into inventory of 20 BCF for today's EIA inventory report to be released at 10:30 AM. My projection for this week is shown in the following table and is based on a week that experienced a considerable amount of Nat Gas cooling related demand. My injection forecast is based on the fact that major portions of the US experienced above normal temperatures My projection compares to last year's net injection of 87 BCF and the normal fie year net injection for the same week of 90 BCF. Bottom line the inventory surplus will narrow again this week versus last year and the five year average if the actual data is in sync with my projections and within the range of underperformance of injections we have seen over the last several months.
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 535 BCF. The surplus versus the five year average for the same week will narrow to around 504 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections and consensus are coming in the range of 19 to 34 BCF injection with the Reuter's poll consensus at 26 BCF.
Currently markets are mostly lower as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.