Oil prices spent all of Monday's trading session in positive territory mostly as a result of a mild short covering rally after last week's strong losses. The rally in oil prices was also supported by activity by the MEND group in Nigeria who supposedly killed several policemen in the oil rich Niger Delta region. Another failed meeting between Iran and the West over the weekend was marginally bullish for oil prices. With the west and Iran yet to move closer to an agreement… or even schedule another round of talks… strongly suggests that the existing sanctions on Iran will not be eased anytime soon with additional sanctions now a possibility keeping oil off of the market. In addition to the above the evolving situation with North Korea is also modestly impacting the overall market sentiment.
Moving to the external oil price driver's…. economic news was mixed with investor confidence weakening in the Eurozone for the second month in a row but offset by an increase in German industrial production. However, German exports declined for the month of February possibly being impacted by the massive decline in the Yen giving Japan an advantage in the export market. In the UK industrial production and manufacturing both increased for the month of February.
In Asia China's latest measure of inflation indicated that inflation is easing thus reducing the potential for a new round of tightening. The Chinese CPI rose by 2.1 percent in March compared to a year earlier according to the National Bureau of Statistics. The market consensus was looking for a higher level of 2.5 percent. Overall the macroeconomic data released over the last twenty four hours was mixed and a neutral for the oil price direction as well as for the broader commodity complex.
Global equity markets added value over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index is higher by 0.6 percent for the week with the year to data loss for 2013 narrowing to 1.1 percent. Four of the ten bourses in the Index remain in negative territory for the year with Brazil still showing the largest loss. Japan is still on top of the leader board with a double digit gain of 26.9 percent. With the falling Yen this export driven economy is getting a strong boost from Japan doubling down on its quantitative easing program. The US Dow is the only other bourse in the Index showing a double digit gain for the year. Yesterday the global equity market were a positive price driver for the oil complex as well as the broader commodity complex.
After approaching the lowest level since the end of 2011 (on an intraday basis) the spot May Brent/WTI spread has rebounded modestly and has been in a modest short covering rally since Monday afternoon. The spread is higher by about 4 percent compared to yesterday's closing level. With the Pegasus pipeline still shut down and with no indication from Exxon as to when it will restart crude oil inventories in the Midwest are likely to build. Up until early trading on Monday there has been no reaction to the Pegasus pipeline closure as it had not impacted any of the major crude oil spreads… including Brent/WTI.
However, the market is finally starting to recognize that the destocking pattern seen out of Cushing since early February may be temporarily reversed while the logistics of the region gets rebalanced. That said I think the reversal in the Brent/WTI spread has a limited upside move as the cure oil production levels in the North Sea remain robust and should cap any significant move to the upside in the short term. If the EIA data shows a build in crude oil stocks at Cushing (I am expecting a build this week) the spread could widen even further.
At the moment the May Brent/WTI spread is still in an $11/bbl to $13/bbl trading range and should remain within the confines of the trading range until the inventory data is released this week (starting with the API data late this afternoon). From a technical perspective the May spread is forming a short term bottom but will need fundamental support for the bottoming pattern to hold. The market sentiment for further narrowing of the spread is growing on a view that oil will net flow out of the mid-west region especially once the Pegasus pipeline is back to normal operations. I still maintain that the spread will trade in single digits during the second half of 2013.
This week the three oil forecasting agencies will release their monthly oil projections. Last month the IEA lowered its projected oil consumption for 2013 for the second month in a row. I am of the view that the three agencies will likely keep their forecasts at the same levels as last month with a possibility of even lowering the forecast a tad as the economic data since the last report has not shown any noticeably signs of improving over the previous period. Although equity markets in several regions of the world are hitting new highs that does not translate directly to an increase in oil consumption... but it does often act as a leading indicator for what the state of the economy will be looking like down the road. The EIA will release its Short Term Energy Outlook on Tuesday afternoon, OPEC will release it report on Wednesday morning followed by the IEA report hitting the media airwaves on Thursday morning.
This week's round of oil inventory reports will follow its normal schedule with the API data being released on Tuesday afternoon followed by the EIA report hitting the media airwaves at 10:30 am on Wednesday. My projections for this week's inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was colder than normal over the east coast during the report period... and a draw in gasoline stocks as refinery runs remain at below normal levels during the maintenance season.
I am expecting crude oil stocks to increase by about 1.5 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 24.9 million barrels while the overhang versus the five year average for the same week will come in around 38.9 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok and in PADD 2 as the Seaway pipeline has been has been running at constrained levels for most of the report period. In addition the shutdown of the Pegasus pipeline will likely impact this week's report as the line was shut on Friday March 29th or the beginning of the period for this week's EIA inventory snapshot. This will be bullish for the Brent/WTI spread and should serve as a catalyst to keep the short covering rally going.
With refinery runs expected to increase by 0.2 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.5 million barrels which would result in the gasoline year over year returning to a surplus of around 1.6 million barrels while the surplus versus the five year average for the same week will come in around 0.1 million barrels.
Distillate fuel is projected to decrease by 1.5 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 24.1 million barrels.
I am maintaining my view of the entire complex at neutral across the board but with a cautiously bearish bias as inventories are starting to build and jeopardizing the technical bottoms that have been put in place in the complex over the last several weeks. WTI has now breached its range support level as has Brent and refined products. The complex is now showing signs that the next move could be a continuation to the downside.
I am maintaining my view to cautiously bullish for Nat Gas even as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. The shutdown of Georgia Power's coal plant highlights the exposure that currently exists with Nat Gas inventories as slightly below normal levels. From a technical perspective the market has once again broken out to the upside and with a few settlements above the $4 to $4.02 level could certainly result in a test of the next upside resistance level from September of 2011 of around $4.16/mmbtu (although it failed at this level on Monday). Basis the activity on Friday and the evolving fundamental situation I am upgrading my view and bias back to cautiously bullish but with a caution that all should use tight, trailing stops as the situation can change very quickly.
Markets are mostly higher ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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