The big news event of the day as well as the big risk asset market mover of the day on Wednesday was the joint action by the US Federal Reserve and five other Central Banks to boost liquidity and ease the strains of the evolving debt crisis in Europe. I kind of viewed yesterday's action as the major stimulus or quantitative easing program of some sorts or at least one that may result in acting like one and one that now places a put on the global risk asset markets. I also expect more to come as the global economy is not going let Europe fail. Much like the whole concept of too big to fail in the US... Europe falls into the category as being too big to fail. A lot still needs to be done in Europe but this may be the catalyst that finally gets the European decision makers to the point of actually solving this problem once and for all. The result was a massive rally in most all risk asset market...especially in global equity markets.
Overnight the rally continued in Asia even as China's PMI came in below last month. That said the fact that China signaled it was changing its monetary policy by reducing bank capital requirements more than offset today's lower than expected PMI number. Of interest Australia's PMI improved with a clear improvement in export orders. So all is not so negative in Asia with China now potentially on the cusp of see additional easing measures by the Chinese government over the coming months.
The global equity markets rallied around the world after the news of the major coordinated liquidity moves as shown in the EMI Global Equity Index table below. The Index is now higher by 4.4% on the week after rallying by around 3% in the last twenty four hours. The US has once again moved back into positive territory for the year with all bourses now below the 20% bear market threshold. European equities soared higher yesterday as did most other markets. For the year the Index is still down by 14.3% and has a long way to go to recover all of this year's losses. However, at least for this week the global equity markets have been a positive sign that the worst could be coming near an end. This morning yields on French and Spanish bonds receded suggesting yesterday's actions are starting to work.
That said the risk asset market will continue to be all about Europe as yesterday's actions did not solve the debt problems it just eased the exposure. Outside of Europe the economic data in the US continued to show steady but slow growth. The US Fed Beige book conformed that viewpoint also yesterday. Today the ISM factory Index is expected to have increased from last month as we inch closer to tomorrow's always important non-farm payroll number. Yesterday the ADP number showed a surprise increase of over 200,000 new private sector jobs (about double the expectations) suggesting to many that tomorrow's US Labor Department report could be a positive one. In any event it will be a market mover.
While the world was in a rally mode the gains in oil were somewhat muted by the bearish EIA oil inventory report that showed a surprisingly large build in crude oil and an unexpected build in distillate fuel. Yesterday's oil inventory report was mostly bearish but with Europe still dominating the media airwaves the oil market was able to hold on to modest gains for a major portion of the trading session. In the end prices closed in positive territory. Even with the uncertainty surrounding the financial markets (especially in Europe) crude oil fundaments did play a role in price movement on Wednesday and into this morning so far. Total commercial stocks increased strongly led by a huge build in distillate fuel inventories just in time for the start of the upcoming winter heating season while crude inventories also built while gasoline stocks increased marginally.
The inventory report showed a significant build in total stocks, a surprise build in distillate inventories along with a small build in gasoline stocks as implied demand was strongly lower while refinery utilization rates decreased on the week to 84.6% of capacity a decrease of 0.9% in refinery run rates. 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 on the week by 7.7 million barrels. The year over year status of total commercial stocks of crude oil and refined products remain in a deficit position for the 35th week in a row. The year over year deficit came in at 61.6 million barrels while the overhang versus the five year average for the same week remains in a deficit position of around 8.0 million barrels.
Crude oil inventories increased more than the expectations but with the major increase in PADD 5 or the West Coast. With a increase in stocks this week the crude oil inventory status versus last year is still showing a wide deficit of around 25 million barrels while the deficit versus the five year average for the same week narrowed to around 0.1 million barrels. PADD 2 stocks were about unchanged on the week while Cushing stocks declined by about 0.7 million barrels. Crude oil inventories in this region of the US have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI spread was trading at significantly lower levels. The spread continues to trade in a trading range of between $9 to %11.50/bbl premium to Brent.
Distillate stocks increased versus an expectation for a modest decline. Heating oil/diesel stocks increased by 5.5 million barrels as exports seemed to drop off on the week. The year over year deficit narrowed to 19.6 million barrels while the five year average overhang deficit narrowed to about 4.0 million barrels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season comes in much colder than any of the expectations the current level of exports will likely continue.
Gasoline inventories increased marginally on the week versus an expectation for a modest build. Total gasoline stocks increased by about 0.2 million barrels on the week versus an expectation for a build of about 1.0 million barrels. The deficit versus last year narrowed to 0.4 million barrels while the surplus versus the five year average for the same week widened to about 0.9 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 bearish categorization for the entire complex except for jet fuel. Production is up, demand is lower and imports were down but exports were up...all contributing to my mostly bullish assessment.
WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals and geopolitics I am keeping my view and bias at cautiously bullish. In addition the cloud of uncertainty got a tad smaller over the weekend in Europe but we will have to watch Europe closely as the sentiment could change on one or more negative news snippets at any time. WTI & Brent are once again back to being in sync with the direction of the US dollar and euro but are also being driven by the ongoing geopolitical situations in the middle east.
I continue to be a bit more positive for Nat Gas for the short term as discussed in detail above. Right now I would categorize the current market action as a market looking for a reason to move higher and it is starting to get some of that reason...a projection of more normal weather and a constructive technical viewpoint. I am keeping my view and bias at cautiously bullish as I watch how price activity plays out over the next several trading session especially after today's EIA inventory report is released. Expectations are for a net injection of 9 to 10 BCF
Nat Gas continues to look for a steady direction to move in. We have seen several intraday price reversals over the last week or so but since hitting a low about 8 sessions ago the Jan futures contract has slowly been trending higher. Slowly is the keyword as the current price is up about $0.05/mmbtu over the aforementioned timeframe (as of this writing). As I have been discussing for the last several days the market sentiment is changing as more normal, seasonal weather is starting to arrive and inventories should be switching into a withdrawal pattern in the next week or so. At the moment I look at $3.52/mmbtu as being a critical level for the Jan Nymex futures contract. If this level holds we can expect the new short term uptrend to continue...if breached we will likely re-test the contract lows made a few weeks ago.
That said Nat Gas is entering the time of the year when weather will be the main... and at times the only price driver that means anything. It is one thing for the temperatures to start falling to more normal levels but it is whole another issue as to whether or not the upcoming winter weather will result in a withdrawal pattern that exceeds last year's rate as well as the more normal five year average. As the heart of the winter heating season approaches inventory levels are at the highest level they have ever been at. With supply still running at new highs the rate of withdrawals are going to have to be at a greater rate than last year to result in the market remaining in a sustainable upward trend and a trend that results in prices moving above the $4/mmbtu level. So the key to where prices go over the next several months will be totally dependent on how cold it gets and how long it lasts. As I mentioned yesterday I will also be watching the winter intermonth or calendar spreads and as long as they stay in a contango (even a small one) it strongly suggests to me that the market remains oversupplied.
Currently as a new day of trading gets underway in the US markets are mixed.
Dominick A. Chirichella
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