The market continues to focus on Europe and the 30 second news snippets that continue to hit the media airwaves. After Merkel and Sarkozy assured the world they were moving forward with a plan to change the EU treaty and crack down on spending ...which the market viewed as a positive...the S&P potential downgrade of 15 EU countries quickly changed the market sentiment. Late in Monday's session rumors circulated that the S&P was putting most of the EU member countries on downgrade watch sending most all risk assets quickly lower. By the close of the equity session in the US stocks worked their way higher...as did oil but closed well off of the intraday highs of the day. After the close the S&P did announce it may cut the credit ratings of 15 member countries. If nothing else it does put a bit more pressure on the EU leadership to get a solid deal done at the Summit on Friday and it also puts pressure on the ECB to go beyond simply lowering interest rates.
In spite of the S&P potential downgrade the situation seems to be progressing in Europe in the lead up to the Summit. Global Equities are higher for the week ...so far as shown in the EMI Global Equity Index table below. The Index is higher by 0.7% for the week resulting in the year to date loss narrowing to 12.9%. The US Dow remains the top equity market in the Index with five of the remaining nine bourses still showing double digit losses for the year. The global equity markets have been a support for oil prices over the last week or so as the equity market has been signaling that the potential for a deal in Europe is increasing while most macroeconomic data coming out around the world has been improving. That all said the only thing that really matters this week will be the outcome of the events in Europe on Thursday and Friday and how the market digests the results.
Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe and the US are still in the midst of uncertainty suggesting that this week's oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil once again. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. As such this week's oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report. The normal weekly reports get underway this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Wednesday morning.
My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed report with a modest increase in refinery utilization rates which should result in a neutral weekly fundamental snapshot. I am expecting a modest draw in crude oil stocks with an increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and another build in distillate fuel stocks. I am expecting crude oil stocks to decrease by about 0.9 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 22.1 million barrels while the overhang versus the five year average for the same week will come in around 2.4 million barrels.
With refinery runs expected to increase by 0.4% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by about 1.0 million barrels which would result in a gasoline year over year deficit of around 3.2 million barrels while the surplus versus the five year average for the same week will hold steady at around 1.9 million barrels.
Distillate fuel is projected to increase modestly by 1.0 million barrels on a combination an increase in production and a possible decrease in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 20.7 million barrels below last year while the deficit versus the five year average will come in around 4.9 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 experienced pretty much the same directional moves as the projections for this week's inventory report. Thus based on my projections the comparison to last year will result in a minimal year over year change in inventories.
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 have lost my positive bias for Nat Gas as prices continue to move lower for all of the reasons discussed above. I am downgrading my view and bias to neutral with one eye toward cautiously bearish if the winter weather does not arrive pretty soon. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US.
Nat Gas futures prices are falling out of bed once again. The minimal amount of enthusiasm I have had over the last week or so is all but gone as I am moving my view and bias back down to neutral today with one eye toward cautiously bearish even as the winter heating season is just getting underway. The month of November experienced below normal heating degree days across the US and December is not starting out much better when looking at the entire US. There are pockets of colder than normal temperatures in the southwest but in the high population centers of the northeast the temperatures are still relatively mild for this time of the year. It is going to have to get a lot colder over a much broader portion of the US for demand to start to have an impact on the current oversupply situation...including the all time record high amount of Nat Gas already sitting in inventory.
Currently as a new day of trading gets underway in the US markets are mostly
Dominick A. Chirichella
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