Both WTI and Brent have been hugging the upside technical channel breakout level with the spot WTI contract actually trading marginally above the resistance level. Now that the US fiscal cliff deal is in the background the market has moved its focus to the more normal price drivers... economy, fundamentals and technicals and less so on individual events. On the economic front the data over the last month or so has been mostly positive with the exception of the latest FOMC meeting minutes that spooked the market a bit when several members suggested that the massive QE program should end in 2013( I believe it was an overreaction).
Today economic confidence in the EU increased more than expected in December. The index of executive and consumer sentiment increased for the second month in a row to 87 from 85.7 in November. The forecast was calling for an increase to 86.3. The index is in line with the firming of business confidence in Germany. In addition a gauge of European manufacturers sentiment improved to minus 14.4 from minus 15 in November. An indicator of services confidence also increased to minus 9.8 from minus 11.9 while consumer confidence climbed to minus 26.5. Any positive signs for the EU which has been in a recession for the last two quarters is a positive for all risk asset markets including oil. If the EU economy is actually starting to bottom out that is a positive for Chinese exports and thus oil consumption on several fronts. That said it may be a bit too early to ring the bell that the EU is coming out of recession in the short term.
Global equity markets have weakened so far this week after a strong start last week. The EMI Global Equity Index (shown below) is lower by 0.8% for the week but is still showing a year to date gain of 1.6%. London and Paris have moved to the top of the leader board while China and Canada remain the laggards on the list. Global equities have been a positive for the broader commodity complex.
The weekly oil inventory cycle will follow its normal schedule this week. The weekly oil inventory cycle will begin with the release of the API inventory report on Tuesday afternoon and with the more widely followed EIA oil inventory report being released Wednesday morning at 10:30 AM EST. With geopolitics less of an issue or price driver than it was the last month or so the main oil price drivers are likely to be any and all macroeconomic data on the global economy( although this is a light week for macroeconomic data) with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest build in crude oil inventories after last week's large LIFO inventory draw, a build in gasoline and in distillate fuel stocks as the weather was still not winter like over the east coast during the report period. I am expecting crude oil stocks to increase by about 2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 32.2 million barrels while the overhang versus the five year average for the same week will come in around 44.3 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok as the Seaway pipeline has been shut as the operator ready's for restart later this week at an increased capacity of 400,000 bpd. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading at its lowest level since late October. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Brent/WTI spread still trading around the $18.60/bbl level as of this writing. The narrowing of the spread should begin to ease once the North Sea returns to a more normal production level, the situation in the Middle East quiets down and the expanded capacity of the Seaway pipeline starts flowing later this week.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year surplus coming in around 6.5 million barrels while the surplus versus the five year average for the same week will come in around 11.5 million barrels.
Distillate fuel is projected to increase by 1.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 18.1 million barrels below last year while the deficit versus the five year average will come in around 17.1 million barrels.
The following table compares my projections for this week's report (for the categories I am making projections with the change in inventories for the same period last year. As you can see from the table last year's inventories are mostly in directional sync with this week's projections. As such if the actual data is in line with the projections there will be only small changes in the year over year inventory comparisons for just about everything in the complex.
I am maintaining my view at neutral and moving my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are now suggesting that the market may be setting up for a breakout move to the upside as both WTI and Brent are hovering near the channel upside breakout level. 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.
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.
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