Not much has changed over the last week or so insofar as the overall oil complex price direction is concerned. The oil price battle continues with negativity coming from the slowing of the global economy on one side compared to regional supply & demand issues, geopolitical risk and the risk of inflation from the aggressive monetary policies by major central banks on the other side. On the macroeconomic front the latest round of data out of China was somewhat constructive in that GDP came in as expected and all of the other indicators (investments, industrial production and retail sales) beat expectations as well as increasing versus the previous months data suggesting that there is a possibility that the Chinese economy may be in the early stages of forming a bottom. Certainly one month does not make a trend but it is a minor bright spot in a world with mostly bearish macroeconomic data.
On that note US initial jobless claims soared yesterday by over 40,000 suggesting that the US job recovery will be slow at best. However, housing data released on Wednesday indicated that the downtrodden housing market may be ready for a recovery or at least a bottoming. In Europe the data has been mixed with the EU Ministers in the last day of their two day meeting.
According to comments from France's President there have been no discussions on Spain's bailout. Seems the main discussions have been around making the ECB the main euro area banking supervisor by early next year. Although Germany's President did not think that was a feasible time target as she indicated it would take months to set up and also needs European Parliament approval. There were also comments that there is very close cooperation with Greece in trying to resolve its debt issues. Overall I interpret the EU Ministers meeting as a very typical EU meeting in that there is a positive exchange of ideas and objectives but nothing seems to move very quickly. The EU issues will remain one of the main contributors to the cloud of uncertainty that has been engulfing the global risk asset markets for the foreseeable future.
On the other side of the equation the regional issues with gasoline supply in California has subsided as total gasoline inventories built in the US this week more than expected. An excerpt from the EIA's Weekly Petroleum Report this week indicated that unlike other disruptions on the West Coast this year, which affected prices in Washington, Oregon, and California, the impact of last week's disruption was generally limited to California. News that the Exxon Torrance refinery had returned to normal operations on Friday, October 5, calmed wholesale prices. More importantly, on October 7, the California Air Resources Board allowed for an early switch from summer- to winter-grade gasoline.
Typically, summer-grade gasoline must be supplied through the end of October. The waiver allowed more components that are produced at West Coast refineries to be blended into finished gasoline, immediately alleviating supply tightness. In addition, winter-grade gasoline that meets California specifications is more available globally than the summer-grade equivalent. Summer-grade California gasoline is only produced at a limited number of refineries outside of California, and those refineries are significantly distant, including facilities in Asia and Canada's East Coast. By October 16, wholesale CARBOB prices in Los Angeles had fallen to $2.92 per gallon, a one-cent-per-gallon discount to New York Harbor RBOB.
On the crude oil front a bit of support from the surprise announcement by TransCanada that the Keystone pipeline... which moves almost 600,000 bpd of oil from Alberta to the mid-section of the US will be shut for three days due to an anomaly found in Missouri. If that is all it turns out to be there will be little if any major impact on any of the pricing relationships including the Brent/WTI spread as PADD 2 crude oil stocks will likely decline only modestly as a result. If it last for an extended period of time (no indications of that at this point in time) it would then turn out to be somewhat bearish for the Brent/WTI spread. The Brent/WTI spread has been mostly driven by the extended maintenance that has been taking place in the North Sea resulting in a curtailment of crude oil exports from that region.
The maintenance is about over and expectations are for North Sea production to return to normal levels by November. The prospects of this happening has already been pressuring the Dec Brent/WTI spread which is now trading around the $20/bbl level after rising to over $24/bbl just a few weeks ago. The spread may have peaked for the time being as more supply is coming and oil demand in Europe continues to be weak. In addition more oil is flowing from places like Angola, Sudan and elsewhere. As has been the case for a long time there is no shortage of crude oil any place in the world.
On the geopolitical front the war of words continues between Iran and the west. No real movement toward any lasting resolution on Iran's nuclear program even after the EU announced this past Monday that they had tightened up their sanctions on Iran. I do not expect any change in the standoff ... especially ahead of the US election on November 6th. The earliest I would expect to see any movement from either side is sometime during the first half of next year. That said the geopolitical risk premium... although small by historical standards... will remain in the price at least through the end of the year.
The net result from all of the above has been a crude oil market that has been in a modestly wide trading range since the middle of September with the spot WTI price trading between about $94/bbl on the upper end of the range to about $88/bbl on the lower end. The spot Brent contract has been range bound for even longer... going back to the middle of August of this year with the upper end of the range around the $116/bbl level and the lower level around the $107.50/bbl range. At the moment... or at least until after the US election I do not see the oil complex moving significantly outside of the aforementioned trading ranges.
Global equities have lost some of the early gains from earlier in the week but as it stands at the moment it looks like the EMI Global Equity Index (shown below) is heading for a weekly gain. The Index is higher by 1.9% for the week heading into the US trading session with the year to date gain sitting at 8.6%. China continues to remain in negative territory for the year with a loss of 3.3%. If in fact the latest round of macroeconomic data out of China is truly suggesting a bottoming pattern starting to form in the Chinese economy we could see the China bourse pulling itself out of negative territory before the end of the year.
This week the global equity market have been a positive price driver for the oil complex as well as the broader commodity complex. Even with mixed corporate earnings so far the performance of the global equity markets this week suggests that investors and traders may be starting to take a view that the global economy may in fact be starting to balance out and approaching a turning point. Again one week's trading activity does not make a trend by the Index is still slowly trending t the upside since hitting a low at the end of August.
That all said the single biggest negative for all risk asset market is the high level of uncertainly that has been permeating around the globe for the last year with no clear sign that much of the uncertainty is going to dissipate anytime soon. For example after the US elections are decided and that sector of uncertainty is removed from the market attention will quickly be turned to the impending fiscal cliff in the US. Even if that is solved (which I think a comprise will emerge) in some form prior to Jan 1st then attention will revert quickly back to Europe along with the evolving geopolitical risk in the middle east... especially around Iran's nuclear program. So uncertainty is here to stay and as a result I expect the oil markets will continue to trade in a wide trading range... with an above normal level of volatility as many traders and investors continue to trade with a short term time horizon and maintain their trading books accordingly.
I am maintaining my overall view as neutral as I expect the oil complex to continue to trade in a wide trading range as uncertainty continues to cloud the entire complex. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics have continued to remain an issue for market participants.
I am keeping my Nat Gas price view at neutral with bias to the bullish side as the fundamentals and technicals are once again keeping the overall market well bid. As I have previously mentioned the market appears to still be in a buy the dip mode.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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