Today will be mostly abut the outcome of the ECB policy meeting and Draghi's comments about the bond buying program as well as how large the draws will be in US oil inventories. The API repot last night showed a smaller than expected draw in refined products and a larger than expected draw in crude oil versus the consensus expectations. In overnight trading the market is already pricing in something bullish from the ECB meeting as global equities are higher across the board while most commodity markets... including oil are also higher. Short term monetary policy is expected to get a boost as many are expecting at least a 25 basis point cut in short term interest rates by the ECB. However the big event associated with the meeting will be the press conference where the market is expecting Draghi to provide a lot more details of the bond program that he has been talking about for over a month already. As mentioned above the market seems to be pricing in bullish comments.
On a different note but one that is supportive of more aggressive easing out of the ECB was the EU GDP data which declined by 0.2% for the second quarter (versus last year's Q2) as well as a revised decline to 0.5% on year over year basis. The EU is heading for recession with several member countries already in recession. Not only does this region need to put its sovereign debt issues behind it will need to see its central bank to be aggressively accommodative for the next year or more.
The Bank of England just announced that they will continued with their bond buying program or quantitative easing. In addition they kept short term interest rates steady at 0.5%. This may likely be the trend over the next month as the ECB will announce shortly, the US Fed meets next week with many also expecting some action by the Chinese government in the short to medium term. Risk asset markets are getting support not from the current activity of the global economy... as it is slowing on all fronts but rather from the perception that the world will once again be printing more money and trying to inflate its way out of the malaise that has engulfed the global economy.
On the storm front there are no new tropical storms that could impact the oil and Nat Gas region in the US Gulf at the moment. The energy industry is currently in restart mode with about 681,000 bpd or 49.3% of GOM crude oil production still shut in and 1,157 mmcf/d or 26% of GOM Nat Gas production still shut as of yesterday afternoon. This is an ongoing process and I am still expecting producing operations to return to normal within the next week. Refineries are restarting and logistics are also close to normal with LOOP back to normal operations as of September 1. The big impact from the storm will begin to show up in this week's inventory reports and to a lesser extent in next week's reports.
Global equities have increased across the board over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index has narrowed its weekly loss to 0.9% with the year to date gain widening to 2.8%. There is now only one bourses in negative territory for the year... China with Germany still holding onto sizeable gains for the year. At the moment it appears that the perception traders are overtaking the reality traders as the possibility for more stimulus is dominating the macroeconomic scene. Global Equity markets have been a negative price driver for oil and the broader commodity complex over the last week or so but today they are proving support.
The API report showed a larger than expected build in crude oil stocks but a smaller than projected draw distillate fuel and gasoline stocks. The API reported a draw (of about 7.2 million barrels) in crude oil stocks versus an industry expectation for a smaller draw as crude oil imports increased only modestly while refinery run rates also decreased modestly by 3.8%. The API reported a small draw in distillate stocks. They also reported a smaller than expected draw in gasoline stocks.
The report is mixed but mostly bullish. The market is higher across the board in overnight trading and ahead of the EIA oil inventory report at 11 AM today. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning at 11 AM. The API reported a draw of about 7.2 million barrels of crude oil with Cushing, Ok about unchanged but a draw of 0.347 million barrel in PADD 2 which is bearish for the Brent/WTI spread. On the week gasoline stocks decreased by about 2.3 million barrels while distillate fuel stocks increased by about 0.1 million barrels.
This week's inventory report will be impacted and reflective of the lost production of both crude oil and refined products. This week's oil inventory report could likely be a primary price catalyst especially if the actual outcome shows a large decline as projected due to Hurricane Isaac in the Gulf of Mexico. This will be a reminder report that even a hurricane that results in only preemptive shut downs will still have a significant impact on supply and thus inventory levels.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to throttle back runs this week... a result of the preemptive shutdowns ahead of Isaac. I am expecting a significant draw in crude oil inventories, a draw in gasoline and a large draw in distillate fuel stocks all related to Isaac. I am expecting crude oil stocks to decrease by about 11.5 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will now show a small deficit of 0.1 million barrels while the overhang versus the five year average for the same week will come in around 16.2 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading over the $19/bbl premium to Brent level. I am still of the view that the spread will continue the process of normalization over the next 6 months.
With refinery runs expected to decrease by 6% I am expecting a large draw in gasoline stocks. Gasoline stocks are expected to decrease by 5.5 million barrels which would result in the gasoline year over year deficit coming in around 13.1 million barrels while the deficit versus the five year average for the same week will come in around 9.6 million barrels.
Distillate fuel is projected to decrease by 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 33.7 million barrels below last year while the deficit versus the five year average will come in around 29.1 million barrels. Exports of distillate fuel during the storm were likely held back.
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 the same direction as the projections. As such if the actual data is in line with the projections there will only be a significant change in the year over year comparisons for the entire complex...due to Isaac.
I still think the oil price is overvalued and toppy at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. That said this week prices will be impacted by the weekly inventory report as well as by the outcome of the ECB meeting and the growing view that more stimulus from both China and the US is on the way.
I am keeping my view at neutral with a bias to the bullish side until more clarity emerges from Isaac insofar as restarting Nat Gas operations. The warm weather is also returning and could support prices in the short term. The combination of the impact of Isaac and warm weather is likely to result in the upcoming injections continuing to underperform history and thus result in the overhang of Nat Gas in inventory continuing to narrow as it has been for the vast majority of the injection season to date.
Markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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