Oil prices are back to being mostly driven by the markets' view of the global economy, oil fundamentals and secondarily by the geopolitics in the Middle East. Yesterday's macroeconomic data out of the US was disappointing resulting in a round of selling first hitting the financial markets followed by pushing oil prices well off of the highs hit early in the session. The underperformance of the US manufacturing sector offset the positive sentiment that developed overnight after China's better than expected PMI data. In addition the 30 second news snippets were flying over the US fiscal cliff with the Republicans putting their offer on the table and sending the ball back to the Presidents courts.
A deal will get then but not until all sides are finished posturing and trying to get the most for their side. As I have been indicating the main thing for certain is volatility with the potential for sudden reversals in the price of oil and other financial instruments will be the norm during the evolution of the negotiations. I still believe the overriding factor that will bring the parties to a deal is the fear of being blamed for sending the US back into its second recession in four years. As we saw yesterday with the manufacturing data out of the US the economy is fragile and far from on a steady growth pattern. In fact yesterday's US PMI showed the energy dependent manufacturing sector is now in the contraction phase.
Global equities have gained value over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index is up by 0.3% for the week widening the year to date gain to 7.1%. Four of the ten bourses in the Index are now showing double digit gains for the year with Germany still holding the top spot... which it has for most of 2012. China is still struggling showing a year to date loss of 10.2% and likely heading for the second yearly loss in a row. Global equities have been a neutral to slightly bullish price support for the oil markets as well as the broader commodity complex so far this week.
The weekly oil inventory cycle will follow its normal schedule this week. The weekly oil inventory cycle will begin with the release of the API inventory report on Tuesday afternoon and with the more widely followed EIA oil inventory report being released Wednesday morning at 10:30 AM EST. With geopolitics less of an issue or price driver than it was the last few weeks the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals a close second. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest draw in crude oil inventories, a build in gasoline and a small draw in distillate fuel stocks as the weather was modestly colder than normal over the east coast during the report period. I am expecting crude oil stocks to decrease by about 0.5 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 37.5 million barrels while the overhang versus the five year average for the same week will come in around 42.8 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok even as the Seaway pipeline is still pumping. However, refinery maintenance programs in the region are resulting in a building in crude oil stocks. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading at a relatively high premium to Brent and very near the highs recently hit. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Jan Brent/WTI spread still trading around the $21.5/bbl level as of this writing. The widening of the spread should begin to ease once the North Sea returns to a more normal production level and the situation in the Middle East quiets down.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 0.8 million barrels which would result in the gasoline year over year deficit coming in around 9.9 million barrels while the deficit versus the five year average for the same week will come in around 4.7 million barrels.
Distillate fuel is projected to decrease by 0.3 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 29.3 million barrels below last year while the deficit versus the five year average will come in around 34.6 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 this week's projections. 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 just about everything in the complex.
I am keeping my view at neutral and maintaining my bias toward the cautiously bullish side as the oil markets may get a boost from what seems to be a slightly changing sentiment coming from the financial markets. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East remains in the price in anticipation of a spreading of the civil war in Syria as well as the ongoing concerns over Iran's nuclear program. In the short term the price of oil will move based more on the markets view of the global economy, the US fiscal cliff negotiations and less so on the geopolitics. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are once again suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... especially after last week's bearish inventory snapshot. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the early stages of the winter heating season and currently those forecast are all mostly bearish.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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