More stimulus arrived in the developed world overnight with the Australian Central Bank announcing a surprise 25 basis point reduction in short term interest rates to a record low. The RBA has lowered its short term interest rate seven times since the end of 2011. The RBA joins the US, UK, Japan and EU in its aggressive easy monetary policy as most of the developed world remains mired in a sluggish economic growth pattern. The aggressive monetary programs are serving to try to ramp up economic growth but are also providing a floor on most risk asset markets along the way.
In spite of the gains in oil over the last several sessions the fundamental picture for oil remains biased to the bearish side. This week there will likely be another build in crude oil stocks. In addition I am expecting the EIA to decrease their 2013 global oil demand growth forecast when they release their latest Short Term Energy Outlook report later today. Oil is well supplied on a global basis with US crude oil inventories at the highest level in over eighty years. Global demand is sluggish at best and as such the vast majority of the price gains in the oil complex over the last month or so have been mostly driven by support coming from the aggressive monetary policies in the developed world economies.
As I have been warning since last week the June Brent/WTI spread has been forming a bottom and as predicted has hit a short term turning point with the spread widening modestly on Monday and continuing to widen in overnight trading. Although I am expecting another decline in Cushing crude oil inventories this week the market is starting to turn its attention to what looks like a change in the supply patterns in both the US mid-west and out of the North Sea.
In the US Enbridge's planned shutdown of the Ozark pipeline for 10 days beginning June 10th will reduce the flow of oil from Cushing. The Ozark pipeline has a capacity of 215,000 bpd moving crude oil from Cushing to Wood River, Illinois. Enbridge said June's capacity will be reduced by 40 percent or basically by about 2.5 million barrels. This could certainly derail the newly emerged destocking pattern that has been in play in Cushing for the last month or so.
On the North Sea side of the equation the Brent pipeline system may have to close briefly during repairs to the Cormorant Alpha platform which would result in an interruption in Brent flow. In addition the Ekofisk field will be undergoing maintenance further reducing the flow of North Sea oil… which is supportive for the spread. Finally the spread has been supported by the increased geopolitical risk coming from the Middle East in and around Syria.
For the moment the narrowing trend of the spread has turned the corner and is now in a short term widening pattern that could easily test the upper boundaries of the trading range of around $10 to $10.50/bbl. Hopefully those that were short took our advice and were stopped protecting most of your profits. The spread still remains within the boundaries of the trading range that has been in play for the last two weeks with $8.25/bbl on the low end and $10-$10.50/bbl on the high end with the market bias currently toward the widening side. I view the current move in the spread as a temporary trend change in an otherwise broader narrowing trend that will resume.
The liquidity/easy money policy rally in equities continues into this week as shown in the EMI Global Equity Index table below. The EMI Index has gained 0.65 percent for the week (so far) pushing the year to date gain to 1.7 percent or the highest level since early March. Only two bourses remain in negative territory for the year… Brazil and China with three bourses now showing double digit gains for 2013. Japan continues to surge higher with a 36.4 percent gain for the year to date with both the US and London holding the other two top spots… all easy money policy countries. Global equities have been a positive price support for oil and the broader commodity complex.
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 build in distillate fuel... as some areas of the US returned to spring like temperatures during the report period... and a small draw in gasoline stocks even as refinery runs are expected to show a small gain.
I am expecting crude oil stocks to increase by about 1.8 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 17.6 million barrels while the overhang versus the five year average for the same week will come in around 34.5 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok even though the Pegasus pipeline has remained shut down for all of the report period. This will be bearish for the Brent/WTI spread but as discussed in detail above other factors are in play and are likely to offset this driver.
With refinery runs expected to increase by 0.2 percent I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.3 million barrels which would result in the gasoline year over year surplus of around 8.6 million barrels while the surplus versus the five year average for the same week will come in around 3.8 million barrels.
Distillate fuel is projected to increase by 0.6 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 4.4 million barrels below last year while the deficit versus the five year average will come in around 17.8 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's inventories are not in directional sync with some large differences compared to last year's changes. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for most everything in the complex.
I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. On the other hand the market has been pushing oil and other commodity values higher as more liquidity from advanced country central banks continues.
I am maintaining my view at neutral for Nat Gas and keeping my bias at cautiously bearish as today's price reversal and breaching of the lower range support level suggests lower prices may still be in the cards. The fundamentals are less supportive after today's inventory snapshot. Markets are mostly lower ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
Copyright CME Group All rights reserved.