Greece but mostly concerns over Spain on Wednesday sent global risk asset markets tumbling once again. Oil was hit particularly hard falling over $3/bbl for both WTI and Brent as the view of a slowing global economy is viewed directly as a slowing of oil consumption growth. Since Europe opened the selling subsided as the macroeconomic data out of Europe came in within the expectations while the market awaits GDP and the start of the employment data cycle out of the US. In fact oil is trading off of its lows from Wednesday and equity values in Europe and the US are now higher on the day as the euro is also off its lows from Wednesday and has recovered some of its strong losses. Overall the global risk asset markets are still clearly in a downtrend with a lot of technical damage done after yesterday's sell-off.
In Asia Japanese industrial production data came in weaker than expected which is a negative for oil or simply energy consumption. In addition the market has reacted over the last day to comments that China is only likely to embark in a sort of mini-stimulus program significantly smaller than what they did in 2009. Asia is joining the world in seeing their economies also slowing. As the global economy slows oil demand growth will certainly slow.
As has been the case the number one bearish price driver for oil and most all risk asset markets has been Greece and Spain and remains Greece and Spain. Nothing has changed overnight as those issues are still in the forefront. Today's stabilizing of prices is more to do with a bit of short covering as a new round of macroeconomic data hits the media airwaves. In addition just about all markets are once again very oversold so anything that the market can hold onto that looks bullish is likely to be embraced very strongly and possibly serve as a strong short covering rally catalyst. That could come from the EIA inventory data today (less likely) or from the GDP and employment numbers out of the US today and tomorrow.
The macro trade is driving the markets with very minimal individuality in any of the markets. Oil, the euro, the USD, global equity markets, the broader commodity complex and the US bond markets are all tightly linked together. Almost all of the aforementioned markets are moving tick for tick with each other with the falling euro primarily the leading instrument during this week's sell-off. I do expect the macro trade to remain in play for the foreseeable future as cash is continuing to flow into the US dollar and bond markets and out of equities , oil and commodities. At the moment there is a huge lack of confidence in the ability of the EU to solve its debt issues while confidence is also waning that the global economy will experience a growth spurt anytime soon.
Global equities are continuing to slide lower as shown in the EMI Global Equity Index table below. The EMI Index is now at the lowest level for the year with the year to date loss now sitting at 2.1% or a 17.3% downward swing since peaking in March. Four of the ten bourses in the Index remain in negative territory for the year with Germany and China still holding the top spots. The US Dow is now showing a year to date gain of just 1.7%. Overall global equity markets are a negative for oil and are pointing to a slow growth global economy at best.
The API report showed a modest draw in crude oil versus an expectation for a build and a surprise build in gasoline stocks along with a larger than expected draw in distillate fuel inventories. The API reported a draw (of about 0.4 million barrels) in crude oil stocks and outside of the expectation range as crude oil imports increased slightly as did refinery run rates which increased by 1.8%. The API reported a large build in gasoline stocks with about half of it coming on the West Coast. They also reported a modest draw in distillate stocks versus an expectation for a more seasonal build in distillate fuel inventories.
The report is bearish for gasoline, neutral for crude oil and slightly bullish for distillates. The market has not reacted strongly in overnight trading but has been stabilizing for all commodities in the complex mostly due to short covering after yesterday's strong sell-off. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning at 11 AM. The API reported a draw of about 0.4 million barrels of crude oil with a draw of 0.9 million barrels in PADD 2 and a decline of 0.6 million barrels in Cushing, Ok which is bearish for the Brent/WTI spread. On the week gasoline stocks increased by about 2.1 million barrels while distillate fuel stocks decreased by about 1.3 million barrels.
At the moment oil prices are still being mostly driven by the direction of the euro and the US dollar as well as by a view that the global economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West have been easing as another meeting will take place in June. As such we may not see much of a reaction from market participants to this week's round of oil inventory data as the macro risk off momentum is currently the main concern of al market players. This week's oil inventory report will likely be a background price catalyst unless the actual outcome is significantly different from the market projections.
My projections for this week's inventory reports are summarized in the following table. I am expecting a build in crude oil and distillate fuel with a small decline in gasoline stocks. I am expecting a build in crude oil inventories and a build in distillate fuel stocks as the summer planting season is winding down (decreasing the demand for diesel fuel) while heating oil demand is over. I am expecting crude oil stocks to increase by about 0.7 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 9.4 million barrels while the overhang versus the five year average for the same week will widen to around 32.4 million barrels.
I am also expecting a modest build in crude oil stocks in Cushing, Ok as the Seaway pipeline did start pumping but it was not at capacity during the inventory report period. This would be bullish for the Brent/WTI spread in the short term which is still trading around the $15.50/bbl premium to Brent level for the last few days. That said I am still of the view that the spread will begin the process of normalization over the next 3 to 6 months.
With refinery runs expected to increase by 0.2% I am expecting a small build in distillate stocks. Gasoline stocks are expected to decrease by just 0.2 million barrels which would result in the gasoline year over year deficit coming in around 11.5 million barrels while the deficit versus the five year average for the same week will come in around 33.9 million barrels.
Distillate fuel is projected to increase by 0.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 20.4 million barrels below last year while the deficit versus the five year average will come in around 14.6 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 inventories were mixed. As such if the actual data is in line with the projections there will be a modest change in the year over year comparisons for most of the complex.
I am keeping my view at cautiously bearish after oil broke down on all fronts once again as it has already tested the May 23rd low for WTI and dropped below the $105 level for Brent for the first time since December of 2011. but Oil is still solidly below the trading range it was in just a few weeks ago and well below several key support areas. WTI is still solidly trading in double digits with Brent slowly heading in that direction.
I am keeping my view at neutral and keeping my bias at neutral with an eye toward the upside now that Nat Gas has moved back to much more representative levels that are in sync with current fundamentals. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season. However, I still believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
The newly anointed spot July futures contract isn't trading any better than the expired June contract traded over the last several days. However, after falling strongly overnight the market has been in sideways trading pattern since early this morning. I am not ready to say that the downside correction is over but at least for today prices seem to be stabilizing around the $2.45/mmbtu level. As I have been warning for weeks the market was ahead of what the current fundamentals were suggesting the price level should be at. We have now corrected to a level that is very much within the range of what I would call a value much more representative of the nearby fundamentals.
The July Nat Gas contract peaked at about $2.81/mmbtu on 5/24 and in the last three trading sessions it has declined by about $0.39/mmbtu or almost 14%. The correction has occurred in a much shorter period of time than I anticipated. However, the economic advantage of coal to Nat Gas switching is widening once again. The advantage of Nat Gas over coal is now around $0.40/mmbtu on a macro basis (using Nymex Appalachian coal and Nat Gas prices converted to $/mmbtu). At current price levels power related demand should remain robust using Nat Gas or at a minimum the amount of coal that switched to Nat Gas should not switch back based purely on economics. This should contribute to Nat Gas starting to form a bottom in the foreseeable future.
As I have mentioned we are at the time of the year where the daily weather forecasts are also going to start to impact the short term price direction for Nat Gas. The latest NOAA six to ten day and eight to fourteen day forecasts are projecting above normal temperatures over the majority of the US (except for the west coast) until about the middle of June. There should be some cooling demand that will likely get met with Nat Gas which also should help in forming a short term bottom in prices.
Currently markets are mixed as shown in the following table.
Dominick A. Chirichella
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