A combination of better than expected macroeconomic data including improved PMI data from China, Europe and the US seems to have moved the oil complex back to being more in sync with global equities... the leading indicator for the global economy. The oil complex has been de-linked with the macroeconomic data for the last few weeks or so and after relatively consistent better than expected economic data oil market participants may be turning back their focus to the data for price direction guidance. There are many signs of late that are suggesting that the global economy may have turned the corner and may be setting up for a more accelerated growth pattern. If so oil demand growth would certainly be impacted especially from the emerging market countries with China in the lead.
The Seaway saga continues with talk that flow rates were down to only 2,000 bpd at one point yesterday but later increased to about 277,000 bpd based on estimates provided by Genscape. The higher level is about the level the line was pumping at prior to the announced slowdown by the Seaway operator (the line has still not hit the maximum 400,000 bpd capacity). The Genscape increased rates have not been confirmed by Seaway rather the only official statement from Seaway yesterday was the line was running at a reduced rate due to problems downstream of Seaway (market rumors are suggesting an electrical problem) and due to high inventories at the Jonas Creek terminal. A scheduled Philips refinery turnaround was also mentioned as part of the reason for the slow down. I think the fact that high inventories and a refinery turnaround were mentioned as a cause for the problem suggest to me that the Seaway line may be saddled with inventory bottlenecks in and around the Jonas terminal for awhile. I believe if the problem was simply an electrical problem it most likely would have already been fixed. Inventory issues are the problem and with maintenance season getting underway this could be a lingering problem.
Needless to say the Brent/WTI spread has been very volatile over the last two trading sessions with the March spread widening by about $1.80/bbl on Wednesday... the day of the first announcement of the slowdown. Then the spread narrowed about $0.50 to $0.75/bbl early yesterday only to end the session narrowing by about $0.20/bbl. The spread has held steady overnight and is still trading at a level that suggests that the Seaway pipeline is still running at a restricted rate irrespective of the Genscape data from yesterday afternoon. There is still no official word from Seaway as to when the line will be back to normal operations. As I said yesterday this is a bump in the road of what I am still expecting to be a longer term trend of the Brent/WTI spread narrowing back to single digit levels during the second half of this year.
On the economic front another positive data point with the German business sentiment strengthening to the highest level since last June. A survey by the Ifo Institute reported that the headline business climate index rose to a seven month high of 104.2 in January from 102.4 in December. The market was looking for a 103 level. From an oil perspective sentiment rose most notably in the manufacturing and construction sectors... both energy intensive sectors.
Global equities were mixed over the last twenty four hours with the Index marginally lower as shown in the EMI Global Equity Index table below. The Index is now lower by 0.1% for the week resulting in the year to date gain narrowing to 2.6%. London and the US continue to hold to two top spots in the Index with Brazil now at the bottom of the list. Global equities have been a positive price driver for both the oil complex and the broader commodity markets for most of the year so far. Europe and the US are both starting their session out in positive territory.
Yesterday's EIA inventory report was mixed as total commercial stocks decreased modestly on the week. Overall I would categorize the report as neutral even as total commercial stocks decreased while crude oil inventories gained and imports decreased. Refinery utilization rates decreased strongly by 4.3% on the week to 83.6% of capacity which will also be bearish for crude oil as demand declines heading into the maintenance season. 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 by 2.7 million barrels. The year over year surplus came in at 53.8 million barrels while the surplus versus the five year average for the same week held at 65.8 million barrels.
Crude oil inventories increased (by 2.8 million barrels) versus a market expectation for a smaller gain. 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. With the increase in stocks this week the crude oil inventory status versus last year is showing a surplus of around 28.3 million barrels while the surplus versus the five year average for the same week came in around 37.5 million barrels. Crude oil imports declined on the week as the industry continues to readjust after managing their yearend inventory levels.
PADD 2 crude oil inventories declined by about 0.4 million barrels while Cushing, Ok crude oil inventories also decreased by about 0.5 million barrels on the week. The decline in crude oil inventories in PADD 2 and in Cushing is bearish for the Brent/WTI spread. However, as I have been discussing in the newsletter for the last few days the impact of the reduced operating level of the Seaway pipeline has trumped the inventory data this week.
Distillate stocks increased for the fourth week in a row versus an expectation for a small draw even as refinery run rates decreased by 4.3%. Heating oil/diesel stocks increased by 0.5 million barrels on a week that experienced mostly normal temperatures along the highly populated north east. The year over year deficit narrowed to 12.6 million barrels while the five year average deficit also narrowed to about 15.4 million barrels. Since mid December distillate stocks have risen by about 16.5 million barrels narrowing the year over year deficit to the lowest levels in long time.
Gasoline inventories declined for the first time in weeks versus an expectation for a modest build. Total gasoline stocks decreased by about 1.7 million barrels on the week versus an expectation for a build. The surplus versus last year narrowed to 6.1 million barrels while the surplus versus the five year average for the same week also narrowed to about 8.3 million barrels. Gasoline inventories have built by about 32 million barrels since the middle of November.
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 for the complex. Overall this week's report was biased to the neutral side.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a further move to the upside now that the spot WTI contract has breached its upper resistance level.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather forecasts. 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 in the heart of the winter heating season and currently those forecasts are bearish at the moment.
A bullish weekly inventory report was not enough to push the Nat Gas futures market back into positive territory nor was the latest NOAA short term weather forecast which was more supportive than the previous day's forecast. The Nat Gas market may be slowly moving into a mode of too little too late so to speak as February is the only month of the remaining winter heating season that is currently projected to experience winter like weather over major portions of the country.
As I have been indicating for weeks the winter heating season is running out of time to have a major impact on the ending inventory levels at the end of the heating season. As it stands at the moment my model is still projecting an end of winter inventory level around the 2 TCF level which is modestly below last year's all time record high ending inventory level of around 2.4 TCF but still almost 20% above the more normal five year average ending inventory level. The market may also be in a mode of most of the bullish news is already built into the price. If we compare yesterday's spot Nat Gas futures price ($3.476/mmbtu) versus the same day last year ($2.554/mmbtu) one can quickly see that the market is $0.922/mmbtu higher or 36.1%. Thus one sign that a lot of cold weather compared to last year's warmer weather is already built in.
Looking at the April Nat Gas contract or the contract that would be in play on the last official day of the winter heating season compared to where the futures market closed last year at the end of March one sees an even larger difference. The current April contract is currently trading $1.379/mmbtu higher than the end of season futures price or 64.9%. With the month of March projected to experience above normal temperatures the differential should narrow between this year versus last year's price. Thus another signal that the market has priced in a lot more winter than we may be actually going to get.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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