Oil continued to be under pressure throughout most of Tuesday's session as did the majority of risk asset markets. The view that the global economy is slowing and the European sovereign debt issues may be a problem once gain were the primary price drivers for all risk asset classes including the oil complex. The evolving geopolitics in the Middle East played a minor role in yesterday's trading and continued to act as a put or floor in the price of oil. The rhetoric is bound to ratchet up over the next few days leading up to the April 13/14 meeting and as such the oil complex will likely have limited downside for the next several days. The outcome of the meeting will set the stage for how oil prices trade over the coming months insofar as how the market views the risk of military action in the region.
The downside correction in global equity markets continued throughout Tuesday's session but seems to have slowed as of this morning. The EMI Global Equity Index (table below) is now down by 2.7% for the week narrowing the year to date gain to 7.3%. The Index has given back over half of the gains for the year and is now back to where it was in the second half of January. Canada has now moved into negative territory for the year with London hovering near the unchanged level. Germany and Japan remain the only two bourses in the Index that are still showing double digit gains for the year. The downside correction is all about a growing view that the global economic recovery is slowing in both the developed and emerging market world. The market is currently is a bit oversold and I would expect the downside correction to subside in the very short term but unless the upcoming macroeconomic data starts to point toward an increase in the rate of growth of the global economy most equity bourses will be susceptible to further moves to the downside.
The EIA released their latest Short Term Energy Outlook. Following are the highlights related to the Oil sector.
- EIA has lowered the forecast 2012 average U.S. refiner acquisition cost of crude oil by $2 per barrel from last month's Outlook to $112 per barrel, still $10 per barrel higher than last year's average price. EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $106 per barrel in 2012, the same as in last month's Outlook but $11 per barrel higher than the average price last year. Constraints in transporting crude oil from the U.S. midcontinent region contribute to the expected discount for WTI relative to other world crude oil prices. EIA expects WTI prices to remain relatively flat in 2013, averaging about $106 per barrel, while the average U.S. refiner acquisition cost of crude oil averages $110 per barrel.
- World liquid fuels consumption grew by an estimated 0.79 million bbl/d to 87.9 million bbl/d in 2011. EIA expects that this growth will accelerate over the next two years, with consumption reaching 88.8 million bbl/d in 2012 and 90.1 million bbl/d in 2013. Non-OECD countries will account for essentially all of the world's consumption growth over the next two years, with the largest contributions coming from China, the Middle East, and Central and South America. OECD liquid fuels consumption is projected to decline by about 400 thousand bbl/d in 2012, with Europe and the United States accounting for almost all the decline. In 2013, forecast OECD liquid fuels consumption is expected to recover slightly by 100 thousand bbl/d, driven by higher consumption in the United States.
- EIA expects global liquid fuels consumption will increase by 0.89 million barrels per day (bbl/d) in 2012, while total liquids supply increases by 1.81 million bbl/d, 0.85 million bbl/d from countries outside of the Organization of the Petroleum Exporting Countries (OPEC) 0.97 million bbl/d of crude oil and non-crude liquids from OPEC-member countries. The larger increase in total supply compared with consumption growth is misleading, however, as the 2011 balance between supply and consumption resulted in a supply shortfall of 0.77 million bbl/d that contributed to a decline in world inventories, including the coordinated drawdown in government-held stocks in countries belonging to the Organization for Economic Cooperation and Development (OECD) last summer. Consequently, the change in the supply-demand balance for 2012 reflects the increase in supply over last year that is forecast to maintain stocks near current levels.
- Several uncertainties could push oil prices higher or lower than projected. A number of non-OPEC countries are currently undergoing supply disruptions. Oil prices could be higher than projected in this Outlook if their recoveries from the disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. Additionally, although the effects of the impending European Union embargo and other sanctions targeting Iranian crude oil imports are still uncertain, heightened market anxiety surrounding a potentially significant supply disruption could further bolster oil prices. On the demand side, if the pace of global economic growth fails to recover in countries belonging to the OECD, or if economic growth slows in non-OECD countries, prices could be lower.
- EIA expects non-OPEC crude oil and liquid fuels production to rise by 850 thousand bbl/d in 2012 and by a further 840 thousand bbl/d in 2013. The largest area of non-OPEC growth will be North America, where production increases by 560 thousand bbl/d and 180 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and Canadian oil sands. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field in the next year, will increase its total production annually by an average of 170 thousand bbl/d in both 2012 and 2013. In Brazil, output rises annually by an average of 130 thousand bbl/d over the next two years, with increased output from its offshore, pre-salt oil fields. Production also rises in China and Colombia over the next two years, while production declines in Russia, Mexico, and the North Sea.
- EIA expects that OPEC members' crude oil production will continue to rise over the next two years to accommodate the projected increase in world oil demand and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 720 thousand bbl/d in 2012 and then falls by 150 thousand bbl/d in 2013. OPEC non-crude petroleum liquids (condensates, natural gas liquids, coal-to-liquids, and gas-to-liquids), which are not covered by OPEC's production quotas, are forecast to increase by 240 thousand bbl/d in 2012, and by 70 thousand bbl/d in 2013.
- EIA expects Iran's crude production to fall by about 500 thousand bbl/d by the end of 2012, from its previous level of 3.55 million bbl/d at the end of 2011. Iran's decline in output began to accelerate during the last quarter of 2011 and has continued. EIA believes that the acceleration reflects a lack of investment, which is needed to offset natural production declines. A number of foreign companies that were investing in Iran's upstream have halted their activities as a result of previous sanctions against Iran that have made it difficult to do business with the country. EIA's forecast does not factor in any potential effects of the more recent sanctions targeting Iran's central bank and the impending European Union embargo on Iran's crude oil production, because it is too early to assess Iran's ability to place its supply elsewhere.
- EIA estimates that commercial oil inventories held in the OECD ended 2011 at 2.59 billion barrels, equivalent to about 56.0 days of forward-cover (days-of-supply). Projected OECD oil inventories increase slightly, to 2.62 billion barrels and 56.8 days of forward cover, by the end of 2012. Although the forecast December 2012 inventory is slightly lower than the 2.66-billion-barrel level at the end of December 2010, the days of forward-cover are at the highest end-of-year level since 1991 because of a decline in OECD consumption.
The API report showed a much larger than expected build in crude oil stocks for the third week in a row, a surprise build in gasoline stocks along with a surprise decline in distillate fuel inventories. The API reported a strong build (of about 6.6 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories even as crude oil imports decreased while refinery run rates decreased by a surprisingly 2.2%. The API reported a modest build in gasoline stocks and a surprise draw in distillate stocks versus an expectation for a more seasonal build in inventories.
The report is bearish for crude oil & gasoline but neutral for distillate fuel. The market has moved higher overnight since the report has been issued but on relatively low volume. The upside move in oil is more as a result of a short covering rally that is going on in most all risk asset markets at the moment. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out tomorrow. The API reported a build of about 6.6 million barrels of crude oil with a build of 0.5 million barrels in PADD 2 and a build of 0.3 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread. On the week gasoline stocks increased by about 1.2 million barrels while distillate fuel stocks decreased by about 0.5 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 China's economy is starting to slow. The tensions evolving in the Middle East between Iran and the West remain a primary concern to the market especially as the weekend meeting approaches. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data suggesting that this week's oil inventory reports may not have a major impact on price direction. 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.
My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed inventory report this week with a modest build in crude oil and distillate fuel inventories and a decline in gasoline stocks along with a small increase in refinery utilization rates. I am expecting a draw in gasoline inventories as well as a small build in distillate fuel stocks as winter like weather was absent for most of the US during the report period...except for parts of the northeast. I am expecting crude oil stocks to increase by about 1.9 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 5.0 million barrels while the overhang versus the five year average for the same week will widen to around 20.8 million barrels.
Even with refinery runs expected to increase by 0.2% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 1.0 million barrels which would result in the gasoline year over year surplus coming in around 11.2 million barrels while the deficit versus the five year average for the same week will come in around 13.8 million barrels.
Distillate fuel is projected to increase by 0.3 million barrels on a combination of steady exports and mixed weather last week. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 14.7 million barrels below last year while the surplus versus the five year average will come in around 4.1 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 for the same week the inventory changes are not in directional sync with the projections for this report. 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 neutral for oil as it is once again hovering around my range support of $102/bbl (basis WTI) while the data out of China is also pointing to a potential slowing of oil consumption . Geopolitics will remain the main price driver leading up the Iran/West meetings on April 13/14th but until I get more clarity as to how the meeting is likely to turn out I am more comfortable staying on the sidelines today.
I am still keeping my view at and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season. As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.
Currently markets are mostly higher as shown in the table below.
Dominick A. Chirichella
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