The risk off trading pattern has been the dominant pattern for most of the week (so far). Everything in the oil complex is lower for the week with WTI leading the way down resulting in a modest short covering based widening of the May Brent/WTI spread. The Brent/WTI spread is mostly driven by the potential for inventories to temporarily increase in Cushing as a result of the Pegasus pipeline shutdown. The macroeconomic data has been mostly negative this week with the main event… US nonfarm payroll data… set to hit the media airwaves at 8:30 AM EST today.
With the downside miss on the ADP private payroll report and another increase in the weekly initial jobless claims many are now expecting a downside miss on the nonfarm payroll number. The market had been originally forecasting 185,000 to 190,000 new jobs for the month of March compared to 236,000 in February. The headline unemployment rate is forecast to remain at 7.7%. I think the number will be slightly below the forecast at around 170,000 to 175,000 new jobs. Not a big miss but if the actual number does turn out to underperform there is likely to be another round of selling in most risk asset markets.
On the geopolitical front another round of talks between Iran and the west began in Kazakhstan today and will continue into tomorrow. The last round of talks were deemed to be successful enough to schedule the current two day session. The west is looking for a response from Iran based on what the west put on the table at the last meeting. I am not sure how much progress will be made based on the historical results of the negotiations that have been going on for many years. In addition, with all of the rhetoric associated with North Korea Iran may feel less compelled at the moment to give in a whole lot as the US has its hands full in dealing with North Korea and minimal attention is likely being focused on Iran in the short term. That all said it would certainly be a very strong positive if any negotiated agreement is reached. If more progress is made I would view that as bearish for oil prices as any deal would likely involve an easing of the sanctions.
On the technical side of the equation everything in the oil complex is clearly in a short term downtrend. The spot WTI contract has moved into a lower $92/bbl to $96/bbl trading range while the spot Brent contract is currently pushing into yet another lower trading range of around $104.25 on the low end to $106.25 on the high end.
On the refined product side the spot HO contract is now in a $2.92 to $3/gallon range while the spot Gasoil contract is trading in a new lower range of about $899/mton to $880/mton. Gasoline has moved strongly lower this week as many seasonal speculators head for the exits as the refinery maintenance season is coming to an end. The spot gasoline contract is trading in a $2.88 to $2.95/gallon range. Overall the entire complex has a downside bias.
The May Brent/WTI spread has only reacted minimally to the announcement of the Pegasus pipeline shut down. On Monday the spread widened all the way to the mid- $14's but by the end of the session quickly reversed and headed back to the $13 to $13.50/bbl level. The spread has been trading in $13 to $14/bbl range since Tuesday. At the moment the spread is being impacted on the narrowing side by another small draw in Cushing inventories reported by the EIA this week coupled with a robust production level in the North Sea. Forties and Brent are both producing at normal to above normal levels with Brent loadings actually expected to increase modestly in May.
At the moment the market is awaiting any sign as to whether or not the shut down of the Pegasus pipeline will result in an increase in in stocks in Cushing and if so if the market will place more emphasis on a temporary reversal in the destocking trend out of Cushing or on the robust supply situation in the North Sea.
I am expecting Cushing stocks to show a build next week but as just mentioned I am not certain the market will react strongly to a build. The Brent/WTI spread has been in a narrowing trend since the end of February and at the moment that trend is still in play. As of this writing the May spread is hovering near a key technical support level of around the $13/bbl level. If breached with a settlement below this level the narrowing trend is likely to continue for an eventual test of the next support level of about $10.85 to $11/bbl.
Global equity markets have continued to put in a mixed performance as shown in the EMI Global Equity Index table below. The Index is currently lower by 1.6 percent for the week with the year to date loss now standing at 1.7 percent. Two bourses in particular have continued to outperform the rest of the bourses in the Index… Japan and the US Dow. Japan's equity market has been surging in line with the strongly declining Yen. Yesterday the BOJ doubled down on it monetary policy sending the Yen to new yearly lows. A falling Yen is a positive for this export oriented economy. As of today the year to date gain for the Japanese bourse is at 23.5 percent or the highest level for the year so far. The US Dow has been able to hold onto to a double digit gain and maintain second place in the Index leader board. Overall the Index has been a negative price driver for the oil and broader commodity complex for the week.
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 at neutral for Nat Gas as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. I do not expect prices to collapse but I view the moderating temperatures to result in the Nat Gas price rally likely topping out at this time as the lower demand shoulder season finally arrives.
Today's EIA report was simply bullish across the board. The report showed a net withdrawal that was above the market expectations and above both last year and the five year average net injection for the same period. The 94 BCF withdrawal (strongly atypical for this time of the year) was above the market consensus calling for a withdrawal of around 91 BCF. The draw of 94 BCF was greater than my model forecast (-65 BCF withdrawal) this week. The year over year inventory situation remains in a strong deficit position versus last year and has widened this week while the surplus versus the more normal five year average is now gone and showing a deficit. The current inventory deficit came in at 38 BCF versus the normal five year average or about a negative 2.1 percent.
This week's 94 BCF withdrawal compares to a 42 BCF injection into inventory last year (a warmer than normal period) and an injection for the five year average of 4 BCF for the same week.
As I have been discussing in the newsletter I am expecting the market to enter into a trading range of $3.75/mmbtu on the low end to about $4.02-$4.05/mmbtu on the high end for the remainder of the shoulder season and once this week's inventory data has been fully digested. Markets are mostly lower of the US trading session as shown in the following table.
Dominick A. Chirichella
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