From a fundamental viewpoint oil remains driven by a weakening demand picture. In addition supply remains robust as evidenced by yesterday's huge build in crude oil stocks reported by the EIA which is now sitting at an eighty two year high according to Bloomberg. The macroeconomic data continues to validate the weakening oil demand growth scenario as most of the economic data issued over the last few months point toward a slowing of the global economy.
Once again during Asian trading hours HSBS/Markit reported a decline in China's energy sensitive purchasing manager's index. The Index showed that the manufacturing sector growth rate continued to soften with the final PMI number coming in at 50.4 for April versus 51.6 for March. Although the index is still above the so called growth threshold of 50 it is fast approaching the level where manufacturing growth may move into a contraction mode.
Simply put lower manufacturing levels in China translates to lower demand for oil and other energy and commodity products. India also joined China in reporting an easing of its manufacturing sector. In fact the PMI in India dropped to a sixteen month low. The developed world is actually doing even worse in the manufacturing sector as the final HSBC/Markit PMI number for the EU for April came in at 46.7 and solidly in the contraction phase. The export oriented emerging market economies are all feeling the impact of the ongoing recession in Europe and the sluggish growth in the US the two largest target markets for exports.
On the other side of the equation market participants are juggling the weakening oil demand growth picture with the very aggressive and easy monetary policies from several major economies of the world. The US monthly FOMC meeting concluded yesterday with an as expected outcome of all systems go insofar as keeping short term interest rates near zero while printing $85 billion dollars per month earmarked for purchases of longer term bonds to keep that part of the forward interest rate curve as low as possible. With many signs that the US economy is sluggish at best and unemployment remaining a lingering problem it does not appear that the US Central Bank is going to take its foot off of the pedal anytime soon.
In addition to the aggressive monetary policy in the US, Japan and the UK are also actively in the midst of a very aggressive quantitative easing program in an effort to keep longer term rates low as well as trying to push inflation higher in Japan's case, a country that has been suffering from deflation since the 1990's. Today the EU's Central Bank (ECB) is meeting with many expecting the ECB to lower short term interest rates to try to jump start the recession laden European economy. An announcement and a press conference by ECB head Draghi will occur this morning.
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So on one end oil supply and demand balances remain biased to the oversupplied side of the ledger and thus bearish for oil prices going forward while the aggressive stimulus programs around the developed world are currently putting a floor on oil and other commodity prices. The floor on oil prices comes from the view that the ongoing and aggressive QE programs could eventually bump up the inflation rate and thus a positive for higher oil prices. I must say that the aforementioned QE programs have been in place for over four years and at the moment inflation does not look like it is anywhere near a level in the developed world that would support the view that QE is going to result in a surge in inflation anytime soon.
Global equities have shed some of the week to date gains as shown in the EMI Global Equity Index table below. Most all of the bourses in the Index declined over the last twenty four hours as the negative view of the global economy has offset any of the liquidity euphoria coming from the ongoing QE programs… at least for today. Seven of the ten bourses in the Index remain in positive territory for the year with the EMI Index still showing a 0.8 percent gain for the year to date. The ranking of the bourses remains the same with Japan and the US holding the top two spots (most aggressive QE programs) while London is not far behind… another QE program country. Overall the global equity markets were a negative for oil prices over the last twenty four hours.
Wednesday's EIA inventory report was biased to the bearish side even as total commercial stocks decreased strongly on the week. Overall I would categorize the report as biased to the bearish side mostly on the back of the surprisingly large build in crude oil stocks. Total commercial stocks increased by 6.7 million barrels as crude oil inventories also increased significantly for the week. Refinery utilization rates increased by 0.9 percent to 84.4 percent of capacity suggesting that scheduled spring maintenance may finally be starting to wind down. 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 6.7 million barrels. The year over year surplus came in at 21.7 million barrels while the surplus versus the five year average for the same week widened to 46.6 million barrels.
Crude oil inventories increased (by 6.7 million barrels) significantly more than the market expectation. 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 around an 82 year high. With the increase in crude oil stocks this week the crude oil inventory status versus last year is showing a surplus of around 19.4 million barrels while the surplus versus the five year average for the same week came in around 37 million barrels. Crude oil imports increased strongly on the week. PADD 2 crude oil inventories decreased strongly by about 2.7 million barrels while Cushing, Ok crude oil inventories also decreased modestly by 1.4 million barrels on the week.
PADD 2 crude oil stocks are still showing a surplus of 10.7 million barrels versus last year and 24.9 million barrels versus the five year average. The Cushing area surplus came in at 6.8 million barrels versus last year and 16.4 million barrels compared to the five year average.
There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to a historically normal level of WTI trading at a premium over Brent. The modest decrease in crude oil inventories in Cushing was bearish for the Brent/WTI spread. Along with the robust supply situation in the North Sea as well as the faltering demand picture in Europe the spread remains in a narrowing trend and setting up for a test of the $8.25/bbl support level hit back in December of 2012. There was a modest increase in refinery utilization rates in PADD 2 (increase of 1.6 percent) suggesting that the return from the spring maintenance season may be ending and thus contributing to the crude oil inventory draw in PADD 2 this week
Distillate stocks increased by 0.5 million barrels and within the market expectations as refinery run rates increased by 0.9 percent. Heating oil/diesel stocks increased modestly on a week over week basis as the weather was starting to finally become more spring like. The year over year deficit came in at 8.3 million barrels while the five year average deficit came in around 18.7 million barrels. Gasoline inventories decreased modestly versus an expectation for a smaller draw. Total gasoline stocks decreased by about 2.7 million barrels on the week. The surplus versus last year came in around 6.3 million barrels while the surplus versus the five year average for the same week came in at about 3.4 million barrels.
Gasoline stocks increased in PADD 1 stocks (US East Coast) by 1.1 million barrels this week with the surplus versus last year coming in around 8.3 million barrels with a 7.4 million barrel surplus compared to the five year average for the same week.
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 bearish side.
I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range support levels suggesting further downside potential in the short term.
I am maintaining my view at neutral for Nat Gas and maintaining my bias at neutral even though the spot Nymex contract is continuing to trade above the $4.16/mmbtu level. The market failed for the fourth time on Monday to breach the $4.40/mmbtu resistance and then turned to the downside since failing. I remain neutral until the next resistance level is breaches and the market settles above the $4.40/mmbtu level. This week the EIA will release its inventory on its normal schedule and time... Thursday May 2nd at 10:30 AM.
This week I am projecting the third injection of the season of 30 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced a low level of above normal temperatures during the report period. My projection compares to last year's net injection of 31 BCF and the normal five year net injection for the same week of 67 BCF. Bottom line the inventory deficit hold steady this week versus last year but the deficit will widen compared to the five year average if the actual numbers are in sync with my projections. This week's net injection will be supportive when compared to the historical data.
If the actual EIA data is in line with my projections the year over year deficit will come in at about 808 BCF. The deficit versus the five year average for the same week will widen to around 131 BCF. The Reuters market consensus is projecting the third injection of the season in the range of 24 BCF to 35 BCF with the consensus at 28 BCF.
Markets are mostly higher ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
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