As I detailed in yesterday's newsletter the global oil supply and demand balance can be isolated into two major parts... the US on the supply side and China on the demand side. This week the US side of the equation was bearish on several counts... forecasted production growth for 2013 as well as yesterday's bearish weekly oil inventory report (see below for a more detailed discussion). On the other hand the market got a boost from the demand or China front after the latest Chinese customs data released overnight showing Chinese crude oil imports in December rose by 8% year over year. In addition the value of China's exports grew by 14.1% in December compared with the same period last year.
The data out of China was a positive but the data for the US was more of a negative than the China data in my view. That said it shows the market's bias at the moment is looking for any reason to push values higher as it discounted this week's bearish supply data pretty quickly and embraced the Chinese data released overnight. Thus for the short term the market may have limited downside as the sentiment could be changing more toward an upward bias. In addition the technicals have turned more bullish in that both the spot WTI and Brent crude oil futures contracts have now broken out of the upward trending trading channel to the upside today. If the market settles above these levels it does suggest that WTI could eventually find its way to a test of the $100/bbl level.
Needless to say I would be very cautious on further moves to the upside simply on Chinese export value data versus growing production in the US along with building inventories and a relatively quiet geopolitical landscape. Also when everyone is expecting the market to continue to be driven by relatively normal price drivers it will not be too long before the next act of the comedy of errors play resumes in Washington DC to discuss the fiscal cliff and the debt ceiling. It should be as contentious as ever and will result in the 30 second news snippets hitting the media airwaves and impacting market direction. Or in other words it will not be too long before we move back into an event driven market environment once again.
Global equities have recovered some of their earlier week losses but are still negative on the week as shown in the EMI Global Equity Index table below. The EMI Index is down by 07% for the week but is still higher by 1.7% year to date. London and Hong Kong remain on top of the leader board while China and Canada are at the bottom of the list. Much like 2012 started all bourses in the Index are in positive territory for the year. Equity values had a bull run covering the first quarter of 2012 and a bit beyond. With event uncertainty still looming I am not sure we will get a clear cut repeat pattern this year. This week global equities have been a negative price driver for the oil complex as well as the broader commodity markets... although on the year they have been supportive.
Yesterday's EIA inventory report was simply bearish as total commercial stocks increased strongly on the week. Overall I would categorize the report as biased to the bearish side as total commercial stocks increased modestly along with an increase in crude oil inventories as crude oil imports surged higher on the week. In addition refinery utilization rates increased strongly by 1.3% on the week to 89.1% of capacity. 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 10.9 million barrels. The year over year surplus came in at 56.1 million barrels while the surplus versus the five year average for the same week widened to 75.8 million barrels.
Crude oil inventories increased (by 1.4 million barrels) and within the market expectations for a 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 still showing a surplus of around 31.6 million barrels while the surplus versus the five year average for the same week came in around 43.7 million barrels. Crude oil imports surged on the week as the industry readjusts after managing tier year end inventory levels.
PADD 2 crude oil inventories surged by about 1.8 million barrels while Cushing, Ok crude oil inventories also increased by about 0.3 million barrels on the week. The large gain in crude oil inventories in PADD 2 and in Cushing is bullish for the Brent/WTI spread. The Feb spread is trading around the $18.6/bbl level as of this writing and within about $3/bbl of the contract high for the spread made in the third week in November. That said the spread should shed value as the Seaway Pipeline is ready to restart this week at an increased capacity of 400,000 bpd versus 150,000 bpd that it has been operating at.
Distillate stocks surged for the second week in a row versus an expectation for a smaller build even as refinery run rates decreased by 1.3%. Heating oil/diesel stocks increased by 6.7 million barrels on a week that experienced modestly normal temperatures along the highly populated north east. The year over year deficit narrowed to 12.9 million barrels while the five year average deficit also narrowed to about 11.9 million barrels. Since mid December distillate stocks have risen by about 14 million barrels narrowing the year over year deficit to the lowest levels in long time.
Gasoline inventories continue to grow increasing more than the expectations for a much smaller build. Total gasoline stocks increased by about 7.4 million barrels on the week versus an expectation for a smaller build. The surplus versus last year widened to 12.9 million barrels while the surplus versus the five year average for the same week also widened to about 17.9 million barrels. Gasoline inventories have built by about 33 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 bearish categorization on the week for everything in the complex. Overall this week's report was biased to the bearish side as total stocks are once again back to increasing.
I am maintaining my view at neutral and keeping my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are still suggesting that the market could be setting up for a breakout move to the upside as both WTI and Brent moved above their respective channel breakout levels. There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil.
I am maintaining my Nat Gas view at cautiously bearish as the fundamentals and technicals are now suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to possibly test the $3/mmbtu support level if the actual temperatures are in sync with the latest NOAA 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.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 10th at 10:30 AM. This week I am projecting a strong withdrawal of 170 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a significant amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 117 BCF and the normal five year net withdrawal for the same week of 121 BCF. Bottom line the inventory surplus will narrow strongly this week versus last year and compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year and below the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 30 BCF. The surplus versus the five year average for the same week will also narrow to around 340 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 150 BCF to about a 190 BCF net withdrawal with the Reuters consensus looking for a net withdrawal of 186 BCF.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
Copyright CME Group All rights reserved.