Oil prices are in positive territory heading into the last trading session of the week with everything in the complex setting up for a negative week. Supply issues remain in the forefront as the main price catalyst for the complex with mostly positive macroeconomic news hitting the media airwaves. That said the US FOMC meeting minutes raised concern in the marketplace over an early tapering of the massive quantitative easing program currently in play in the US. Many interpreted the minutes as tapering could begin as early as next month. This view has permeated throughout the market sentiment since mid-week and has resulted in light selling in most risk asset markets.
As I have been discussing in the newsletter most of the main price drivers for the oil complex suggest that oil prices should remain supported. Supply interruptions continue in Libya and other areas in addition to the ongoing maintenance programs in the North Sea. In their weekly Petroleum report the EIA pointed out that disruptions in global supply and liquid fuels production reached nearly 2.7 million barrels per day in July. Fortunately non-OPEC supply has remained robust and offset some of the issues associated with reduced global supply and thus only a modest impact to prices to the upside has resulted.
On the economic front most of the macroeconomic data this week suggested that the global economy is slowly continuing to grow. In particular the latest flash PMI data out of China was much better than expected indicating that the main economic and oil demand growth engine of the world may be stabilizing and turning the corner toward expansion once again. In addition the data out of Europe is continue to show that the EU is emerging from recession and should start to see an increase in its oil consumption at some point.
I view the overall oil landscape as mostly biased to the bullish side and expect the view to remain in this pattern until there are signs that the supply issues that have been plaguing the global supply and demand balances begin to recede. The supply issues have been reflected in the intermonth spreads for both Brent and WTI which remain in a modest backwardation and suggestive that supply is underperforming versus demand.
There are some signs that production in Libya is slowly improving but it is still well below normal levels. The evolving geopolitical conflicts in Egypt and Syria do not show any signs of abating anytime soon and as such continue to destabilize the oil rich MENA region. All of this coupled with the ongoing maintenance programs in the North Sea should continue to serve as a supportive price driver until the supply picture changes.
The aforementioned has also been the main catalyst as to why the Brent/WTI spread has widened since hitting parity in the middle of July. The October Brent/WTI spread surged higher this week... actually doubling in value at one point. The spread went from Brent at $3/bbl over WTI last Friday to as high as a tad over $6/bbl yesterday on an intraday basis. The spread has retraced since failing to remain above the resistance level of around $5.75/bbl but is still currently higher by over $2/bbl on the week as of this writing.
In spite of the massive destocking that has been in play in Cushing (over 13 million barrels in the last few months) the evolving global supply issues have moved into the forefront and have offset the destocking of crude oil inventories in Cushing in most market players sentiment. The destocking in Cushing should continue as refinery utilization rates remain robust and outlets to move oil out of Cushing remain operational. I am expecting another modest decline in Cushing stocks in next week's EIA inventory report. For now the spread will remain with a widening bias until there is a change in the supply issues as well as a return to normal operations in the North Sea.
Global equities have recovered most of the losses from earlier in the week. The EMI Global Equity Index gained approximately 1 percent over the last twenty four hours. On the week the Index is still lower with the year to date loss narrowing to 2.1 percent. Seven of the bourses in the Index remain in positive territory with four still showing double digit gains for 2013. Japan remains on top of the leader board with Brazil still holding the bottom spot but off of its worst levels for year. Global equities have been a negative price driver for the oil complex on the week but more supportive over the last twenty four hours. In addition the US dollar has been moving higher during the week and has also been a negative price driver for oil markets as well as the broader commodity 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.
A smaller than expected inventory injection level sent the spot Nat Gas futures contract up to very near the upper range resistance area of $3.56/mmbtu during Thursday's trading. With a heat wave starting to evolve over major parts of the country the upcoming injection levels are likely to underperform for the next several weeks. Today's injection level was greater than last year but about equal to the so called normal five year average.
The latest NOAA six to ten day and eight to fourteen day forecasts are still projecting above normal temperatures over 80 percent of the US well into the first week of September. During this period the weekly inventory injections are likely to be below the five year average and even possibly less than last year's injection. The deficit may start to widen versus last year while the small surplus versus the five year average may begin to dissipate. The weather is the main driver for Nat Gas prices at the moment and will continue to be the main driver for the next several weeks at least.
The weather pattern could be setting up to delay the start of the low demand shoulder season similarly as the late winter weather extended into the early spring shoulder season which contributed to the large end of the heating season deficit in Nat Gas stocks this year. For the moment the Nat Gas market remains modestly bullish.
Markets are mostly higher 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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