Oil prices are drifting lower ahead of this morning's EIA oil inventory report as well as this afternoon's release of the minutes from the last US Fed FOMC meeting. Last night's API report was mixed with draws in crude oil and gasoline and a build in distillate fuel (see below for more details). The market has been retracing this week in spite of the ongoing supply issues in Libya and now in Iraq. Yesterday the strikes in Libya ratcheted up once again with violence in one of the ports and moves to head off attempts by strikers to sell oil themselves at the largest crude oil terminal according to a report by Reuters. However, the Libyan oil ministry said yesterday that two terminals are ready to resume exports. A mixed picture coming from Libya but one that is still evolving.
In Iraq a bombing stopped crude oil flow through the Iraqi to Turkey pipeline today. Two blasts halted the flow of crude oil through the pipeline due to damage to the line. Even though the market has been drifting lower this week the supply issues that have been in play since the latest upside rally started are continuing and some instances (Iraq) are intensifying. Also the ongoing conflict in Egypt and Syria is also adding support to the geopolitical risk premium that has now evolved into the price of oil…especially Brent.
An area that has not retraced this week… the Brent/WTI spread has continued to widen with a strong surge to the upside occurring during yesterday's trading session. As I have been discussing in the newsletter the spread has been in a short term widening pattern since the spread hit parity in mid-July. This pattern is likely to continue until there is a change in the supply problems in places like Libya and Iraq as well as a return to more normal operations in the North Sea which is in its maintenance program.
Further supporting the widening of the spread was a report by Genscape that the Seaway pipeline (a line from Cushing to the Gulf Coast) was shut down due to problems early yesterday morning and as of late yesterday afternoon the line remains shut. The Seaway line has been pumping between 200,000 to 300,000 bpd for the last month or so. Although there will be another draw in Cushing crude oil stocks this week if the Seaway pipeline remains shut for any length of time the eight week old destocking pattern in Cushing could be interrupted and thus supportive for further widening of the spread.
The externals have not been supportive for oil prices this week with the US dollar Index rising while global equity markets continue to move lower. The EMI Global Equity Index lost about 0.85 percent over the last twenty four hours with the year to date loss widening to 3 percent. Seven of the ten bourses in the Index remain in positive territory for 2013 but only three are showing double digit gains… Japan, US and Paris. Brazil remains at the bottom of the list with a loss of 17.1 percent for 2013. Both equities and the direction of the US dollar have been a negative price driver for the oil markets as well as the broader commodity complex.
Tuesday's API report was mixed with a draw for crude oil and gasoline and a build in distillate fuel inventories built. Total crude oil stocks decreased within the expectations by 1.2 million barrels as crude oil imports decreased modesty while refinery run rates increased by 1.0 percent. The API reported a build in distillate fuel inventories and a draw in gasoline stocks that were outside of the expectations.
The oil complex is lower as of this writing and heading into the EIA oil inventory report to be released at 10:30 AM EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. On the week gasoline stocks decreased by about 3.7 million barrels while distillate fuel stocks increased by about 1.8 million barrels.
The API reported Cushing crude oil stocks decreased strongly by 1.1 million barrels. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the Brent/WTI spread but as I have been discussing in the report the market is focusing more of its attention on supply interruptions out of the North Sea as well as from several international locations like Libya.
My projections for this week's inventory report are summarized in the following table. I am expecting another modest draw in crude oil inventories with a build in distillate fuel stocks and a draw in gasoline.
I am expecting crude oil stocks to decrease by about 1.2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 1.4 million barrels while the overhang versus the five year average for the same week will come in around 15.2 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease modestly for the eight week in a row and continue its destocking trend. This will be bearish for the Brent/WTI spread as the fundamentals are in play and are driving the spread (see above for a more detailed discussion).
With refinery runs expected to decrease by 0.2 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.0 million barrels which would result in the gasoline year over year surplus of around 18.7 million barrels while the surplus versus the five year average for the same week will come in around 12.5 million barrels. With a major portion of the US summer driving season already in the history books gasoline supplies will continue to be more than adequate going forward as total gasoline stocks remain well above both last year and the so called normal five year average.
Distillate fuel is projected to increase by 1.0 million barrels even as exports of distillate fuel out of the US Gulf remains robust. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 4.3 million barrels above last year while the deficit versus the five year average will come in around 20.8 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 in directional sync with the projections. As such if the actual data is in line with the projections there will only be modest changes in the year over year inventory comparisons for everything in the complex.
I am maintaining my oil view at neutral and my bias at neutral for the short term as the upside move now seems to be looking a bit toppy and seems to be losing momentum. The strong destocking pattern of crude oil in the US Midwest could act as a floor in any downside correction as well as the ongoing supply issues in the international markets.
I am maintaining my Nat Gas view at neutral and keeping my bias at cautiously bullish on what seems to be a changing weather pattern to a more supportive short term temperature forecast. The fundamental picture could once again shift if the temperatures across the US do actually move back to large areas of warmer than normal weather as the latest NOAA forecast is currently predicting.
Markets are mostly lower 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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