The reality of growing supplies in the US is finally catching up as oil prices are on the defensive today. Earlier in the week in the EIA Short Term Energy Outlook the EIA projected a significant increase in US domestic crude oil production for 2013 followed by Wednesday's bearish oil inventory report... especially for refined products. The bearish data was mostly discounted until yesterday when refined products started to decline followed by the entire complex trading at lower levels today. That said the decline has been limited in magnitude.
Oil traders and investors have been mostly discounting current or nearby fundamentals and placing more emphasis on projected fundamentals on the premise that the global economy may in fact be at a turning point and readying for a more robust growth period. Whether or not that will turn out to be the case the fact that supply from non-OPEC countries... led by the US will more than offset any demand growth in 2013 in my view. I would emphasize that the perception view should come with a high degree of caution as supply is likely to still outstrip demand and global economic growth may not turn out to be as robust as some of the perception traders are expecting.
We are once again just weeks from the markets moving back more toward an event driven market as negotiations over the US fiscal cliff, debt and deficit get underway in Washington DC. Based on all previous discussions and the state of the political divisiveness in the US this round is not expected to be smooth at all. I would not be the least bit surprised if there were no deal at all with the sequester cuts coming into play. The President continues to indicate that the US does not have a spending problem ( I am not sure where the record deficits came from then) while the Republicans have been saying the tax situation is now over and the only remaining problem is the US spending problem.
Not a good point to start negotiations on issues that have a little over a month to be resolved. Bottom line I am expecting a period of above normal volatility once again with oil and most risk asset markets moving based on the 30 second news snippets that hit the major media airwaves from both sides. In addition to the higher level of volatility the aforementioned scenario will once again be elevating the cloud of uncertainty over the US economy (the global economy to some extent) and thus likely to have a negative impact on short term economic growth.
As it looks at the moment oil may be heading for a weekly gain while global equities should end the week with a loss. The EMI Global Equity Index is lower by 0.6% heading into the US trading session as shown in the EMI Global Equity Index table below. The Index is still higher by 1.8% year to data with China moving into negative territory for the year overnight. Japan currently holds the top spot on the leader board with support coming from the falling Yen... which is a major positive for Japan's export driven economy. Equities and oil have diverged this week as market continue to go through the beginning of the year transition and book building... especially on the equity side.
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 still suggesting that the market could be heading lower for the short term. However, I anticipate that the market is now less likely to 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 lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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