Oil lower on weak PMI data out of Europe

The FOMC meeting concluded with no change in policy with Chairman Bernanke indicating in his presser that the Fed is not ready to change its policy as the economy still needs the stimulus while the cost of its ultra accommodative policy is not an issue. The 6.5 percent unemployment threshold and 2 percent inflation level remain key triggering points for a change in the Fed's policy. The Chairman also said he does not see any major risk to the US economy from the evolving situation in Cyprus. Overall a positive for equity and commodity markets from the Fed as the money printing will continue for the foreseeable future.
China's flash PMI index increased to 51.7 for the month of March compared to 50.4 for February and 50.8 versus the market consensus according to the latest report from HSBC Holdings and Markit Economics. This index is a reliable indicator for the energy sensitive manufacturing sector. China's economy seems to be in a bottoming pattern and on the cusp of starting to accelerate. Today's indicator supports that view.

On the other hand the European area is falling deeper into the contraction zone as the latest round of PMI data is suggesting. The euro zone PMI flash Index came in 46.5 for March compared to 47.9 in February according to Markit Economics. The energy sensitive manufacturing sector is contracting further. The news for Germany... the main export economy within the EU saw equally negative data as its PMI actually moved into the contraction area dropping to 48.9 for March from 51.6 for February. The data out of Europe this morning has cast a negative cloud in today's trading as Cyprus is not the only issue facing the EU... the second recession in four years is much more troublesome.

Speaking of Cyprus the EU just announced that Monday will be the deadline for a bailout deal for Cyprus. After Monday the temporary liquidity will cease unless a deal is done. So far this week the Cyprus parliament rejected the original deal put forth by the EU/IMF/ECB which would require a substantial haircut by Cyprus bank depositors. A few variations of the original deal have been floating around the media airwaves as well as several with Russia getting involved. So far nothing concrete has been achieved for a plan B or C just yet.

Global equities have continued to lose value this week as shown in the EMI Global Equity Index table below. The Index is down by 1% for the week narrowing the year to date to unchanged. The two main bourses that are dragging the Index lower are Brazil with an 8.1% loss of the year and Hong Kong which is still lower by 1.9% year to date. Japan remains the high flyer for the year with a 21.6% gain mostly on optimism that the falling Yen will bolster this export driven economy. With the new BOJ head taking over today it is likely that comments will be hitting the media airwaves regarding even more aggressive quantitative easing which should support a further weakening of the Yen going forward. Overall global equities have been a neutral price driver for oil and the global commodity complex.

Yesterday's EIA inventory report was biased to the bullish side with total commercial stocks decreasing on the week. Overall I would categorize the report as mildly biased to the bullish side. Total commercial stocks decreased by 1.5 million barrels with crude oil inventories declining on the week. Refinery utilization rates increased strongly by 2.5 percent on the week to 83.5 percent of capacity which indicates that capacity is starting to return from scheduled spring maintenance. 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 decreased by 1.5 million barrels. The year over year surplus came in at 24.2 million barrels while the surplus versus the five year average for the same week held at 49 million barrels.

Crude oil inventories decreased (by 1.3 million barrels) versus a market expectation for a modest build in stocks. 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 decrease in stocks this week the crude oil inventory status versus last year is showing a surplus of around 29.9 million barrels while the surplus versus the five year average for the same week came in around 42.3 million barrels. Crude oil imports increased modestly on the week.

PADD 2 crude oil inventories decreased modestly by about 1.3 million barrels while Cushing, Ok crude oil inventories declined by 0.3 million barrels on the week. PADD 2 crude oil stocks are still showing a surplus of 15.7 million barrels versus last year and 27.1 million barrels versus the five year average. The Cushing area surplus narrowed to 10.5 million barrels versus last year and 17.4 million barrels compared to the five year average.

There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to historically normal level of WTI trading at a premium over Brent. The decline in crude oil inventories in Cushing and PADD 2 was bearish for the Brent/WTI spread. There was a large increase in refinery utilization rates in PADD 2 this week (increase of 7.4 percent) suggesting that the spring maintenance season is winding down and the early stages of inventory destocking from Cushing and PADD 2 may continue as crude oil demand increases going forward.

Distillate stocks declined by 0.6 million barrels versus an expectation for a larger draw as refinery run rates increased by 2.5 percent. Heating oil/diesel stocks declined on a week over week basis as the east coast experienced winter like temperatures. The year over year deficit narrowed to 16.8 million barrels while the five year average deficit came in around 18.3 million barrels.
Gasoline inventories decreased within the range of market expectations. Total gasoline stocks decreased by about 1.5 million barrels on the week. The deficit versus last year came in around 4.1 million barrels while the deficit versus the five year average for the same week came in at about 0.2 million barrels. Gasoline stocks decreased in PADD 1 for the second week in a row. PADD 1 stocks (US East Coast) decreased by 0.1 million barrels this week with the deficit versus last year coming in around 0.7 million barrels with a small 0.1 million barrel surplus compared to the five year average for the same week.

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 bullish categorization on the week for the complex. Overall this week's report was mildly bullish.
I am maintaining my view of the entire complex at neutral as the oil complex appears to still be in the process of forming a short term technical bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.

I am maintaining my view to cautiously bullish as long as the spot contract remains above the $3.80 to $3.85/mmbtu area. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.

This week the EIA will release its inventory on its normal schedule and time... Thursday March 21th at 10:30 AM. This week I am projecting an average withdrawal of 62 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest level of above normal Nat Gas heating related demand. My projection compares to last year's net withdrawal of 0 BCF and the normal five year net withdrawal for the same week of 26 BCF. Bottom line the inventory deficit will widen modestly this week versus last year while the surplus will narrow compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be bullish when compared to the historical data and as of the open on Sunday night the market seems to starting to price that outcome into the futures market.

If the actual EIA data is in line with my projections the year over year deficit will widen to about 568 BCF. The surplus versus the five year average for the same week will come in around 63 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a range of 50 BCF to about a 75 BCF net withdrawal with the Reuters market consensus looking for a net withdrawal of 70 BCF.

Markets are mostly lower heading in the US trading session as shown in the following table.

Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.

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