Oil lost its bid on Thursday after negative energy sensitive manufacturing data from Europe offset the marginally positive gain in the manufacturing index from China. Even Germany... the main growth engine in Europe dropped into the contraction mode with its PMI falling below the 50 threshold. Europe seems to be falling deeper into recession while the US continues to grow... but only slowly. The PMI data released yesterday for the US increased marginally.
The external price drivers have also been mostly negative for the oil complex this week with many equity markets around the world in negative territory for the week while the US dollar has remained at elevated levels. The US dollar has been in an upward price trend (which is a negative for oil and most commodities) since bottoming in early February. From a technical perspective the US dollar Index currently looks like it may be running out of upside momentum and may be forming a topping pattern based on the way it has traded this week. The US dollar has been fueled by a solid move in US equities so far this year as the US economy is recovering from... albeit at a slower than normal rate of growth. In addition there has been the usual flight to quality into the US dollar as uncertainty reigns around the world especially in Europe.
China's economic data has been slightly improving but not enough to move the oil market to the upside as oil demand does not yet seem to be accelerating. Overnight China's crude oil inventories declined by 2.9 percent in February, according to the China Oil, Gas & Petrochemicals newsletter. Inventories are now at the lowest level of the year possibly suggesting that there could be an increase in crude oil demand over the coming months as China begins to restock its inventories.
Current or nearby oil fundamentals are still biased to being oversupplied with no shortages of oil anywhere in the world. The market is also looking at the sluggish global economic growth pattern and not seeing any reason to think that oil demand growth is going to surge anytime soon and grow faster than what has been recently forecasted by the three main oil agencies... EIA, IEA and OPEC. Yes the externals are still impacting the short term direction of oil prices but for the moment the externals are still somewhat biased to the bearish side.
The May Brent/WTI spread continues to narrow and is currently trading below $15/bbl for the second time this week. Resistance is now around $15.40/bbl with support still at $14/bbl. With the North Sea oil fields all operating at normal historical levels and with Cushing crude oil inventories in the early stages of a destocking pattern there is no reason to expect a sudden widening of the spread. Rather the spread is back on the track of slowly proceeding with its return to a more normal historical relationship between these two marker crude oils.
Refinery runs are increasing in the mid-west as refiners begin the process of restarting after normal scheduled maintenance. Thus crude oil demand in the region should begin to increase. This coupled with oil flowing out of Cushing via Seaway, rail, barge and even truck this should continue to slowly reduce the surplus of crude oil in the region and thus keep downside (narrowing) pressure on the Brent/WTI spread.
Since peaking in January Cushing crude oil stocks are now lower by about 2 million barrels. There is still a surplus versus both last year and the five year average but we may be seeing an early start to destocking this year versus last year (2012 did not start until May) as there are more outlets for moving oil out of Cushing this year than last year. As I forecast early in the year I am still expecting the Brent/WTI spread to be narrow to single digit levels by the fourth quarter of this year.
In Europe the Cyprus debt crisis is still looming as the Cyprus government continues to work on a Plan B that the troika (ECB/EU/IMF) will accept before the Monday deadline put in place by the ECB. The ECB said they will stop providing liquidity into Cyprus on Monday if a deal is not reached. If a deal is not reached and the ECB stops its liquidity flow to the Cypriot Banks it is very possible that the country's economy could collapse and result in an exit from the euro. This would certainly result in a strong round of euro selling (dollar strengthening ... flight to quality) at least in the short term. The aforementioned actions in the currency markets would also likely prompt a strong sell-off in global equities and most commodity markets including oil.
I am still of the view that some sort of a deal will emerge either today or over the weekend and/or if a deal is close an extension of the Monday deadline could also happen. The EU is expecting a proposal by Cyprus to show how they would be able to raise the 5.8 billion Euros needed to trigger the emergency loans. Cyprus sought help from Russia but so far that has not happened.
Global equity markets are under pressure as shown in the EMI Global Equity Index table below. The EMI Index is heading for its second week in a row of losses. So far with Europe and US trading still underway the Index has lost 1.7 percent for the week pushing the year to date performance into the loss column by 0.7 percent. The rankings within the Index have not changed very much over the week with Japan still holding the top spot with a year to date gain of 18.7% and with the US Dow holding the second spot with a double digit gain for 2013. Brazil continues to be the laggard this year with Hong Kong also in negative territory for 2013. Global equities have been a negative price driver for oil and the boarder commodity complex this week.
I am maintaining my view of the entire complex at neutral as the oil complex still appears to be in the process of forming a short term technical bottom. However, WTI, HO and RBOB have all remained in a sideways trading pattern with refined products trading near the lower end of the trading range while Brent has now breached its range support level. The complex may still be in a bottoming pattern but it is now looking like the probability of another down leg is increasing based on the current assessment of the fundamentals, the way the external price drivers are trading as well as the technicals.
I am maintaining my view at cautiously bullish For Nat Gas as long as the spot contract remains above the $3.82 to $3.86/mmbtu technical support area that will need to hold to keep the current uptrend in play. If this level is breached with settlements below this area there could be a modest retracement in prices. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern and currently those forecasts have continued to be supportive for heating related Nat Gas demand even though spring has arrived.
Thursday's EIA report was bearish versus the market consensus but bullish when compared to the historical data. The report showed a net withdrawal that was below the market expectations but above both last year and the five year average net withdrawal for the same period. Thus the number was only bullish based on a comparison to the historical data. The 62 BCF withdrawal (above normal for this time of the year) was below the market consensus calling for a withdrawal of around 70 BCF. Of interest reclassifications from base gas to working gas resulted in increased working gas stocks of approximately 4 Bcf for the week ending March 15, 2013 in Producing Region salt dome facilities. The draw of 62 BCF was slightly greater than my model forecast (-61 BCF withdrawal) this week. The year over year inventory situation remains in a deficit position versus last year and has widened this week while the surplus versus the more normal five year average has narrowed. The current inventory surplus narrowed to 161 BCF above the five year average or about 9.5% above.
This week's 62 BCF withdrawal compares to an unchanged inventory position last year (a warmer than normal period) and a withdrawal for the five year average of 26 BCF for the same week.
Markets are mixed heading in the US trading session as shown in the following table.
Dominick A. Chirichella
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