Oil prices continue to melt upward from ongoing geopolitical concerns, supply issues in the North Sea due to maintenance as well as a plethora of refinery outages in the US and elsewhere over the last month or so. In addition the perception that a new solution by the ECB as well as a new round of easing has supported most risk asset prices... including oil. Since bottoming out in late June WTI is up by about $18/bbl while Brent has gained about $26/bbl. Nymex Refined products have been more in line with the Brent gains as the spot HO contract has gained about $0.61/bbl while the RBOB contract increased by about $0.50/bbl since the end of June.
The macro price drivers have been mostly quiet for the last week but market participants are still of the view that there will be something new and bold out of the ECB over the next month or so that could finally push the over there year old sovereign debt problems into the background permanently. In addition the markets are looking for any signs of new stimulus and/or easing from the US and China. There is a meeting of European leaders this week that could provide the market with some guidance as to their next direction. In addition Mr. Draghi will be speaking at the Jackson Hole Conference at the end of the month and could possibly provide a signal as to the ECB's next move. Mr. Bernanke is also speaking at this symposium and the QE crowd will certainly be parsing every word of his presentation as to what the Fed's next move might be. The ECB is considering setting limits on yields of Euro zone sovereign bonds according to an article in Germany's Der Spiegel magazine. In essence the plan would call for the ECB to intervene and buy bonds if their interest rates exceed a pre-determined threshold above German bonds. None of this has been confirmed by the ECB but the markets are slowly starting to price in a solution that does result in some form of bond buying by the central bank.
Global equity markets have added to the gains from last week as shown in the EMI Global Equity Index table below. Over the last twenty four hours the Index has gained another 0.2% resulting in the year to data gain widening to 6.3%. Only China remains in negative territory for the year while Germany continues to dominate the Index to the upside. The German bourse is now up by almost 20% for the year to date. Even France is now showing double digit gains for the year as the perception of an EU solution is continuing to gain momentum.
The tropics are once again revving up as there are now three tropical storms working at the moment with one already evolving in the Gulf of Mexico, one off of the coast of West Africa and one that has just been upgraded to a Tropical Depression...TD9... that is heading for the Caribbean. TD9 is now projected to strengthen to hurricane status by the second half of this week and based on the current projected path by the National Hurricane Center should be over Cuba by the weekend. If it continues on this path it could wind up in the Gulf of Mexico sometime next week. The weather pattern that is already in the Gulf has a 30% chance of strengthening to a tropical cyclone over the next forty eight hours while the pattern off of Africa now has a 50% chance of strengthening. As it looks at the moment none of these storms are an immediate threat to the oil and Nat Gas rich area of the US Gulf of Mexico but that could change quickly. However, as I said last week the tropics now must be on everyone's radar and monitored on a daily basis as the activity level is picking up.
This week's oil inventory reports will be released at its regularly scheduled date and time. The API inventory report will be released late Tuesday afternoon with the more widely followed EIA data hitting the media airwaves at 10:30 AM EST on Wednesday. At the moment oil prices are still being mostly driven by the events discussed above along with the direction of the euro and the US dollar as well as by a view that the global economy is continuing to slow and one or two of the major central banks will come to the rescue. The tensions evolving in the Middle East between Iran and the West seem to be moving more into the foreground as the rhetoric between Israel and Iran has ratcheted up several levels over the last few weeks. However, with the low level of trading activity and light economic calendar we could see a more pronounced reaction from market participants to this week's round of oil inventory data even thought the macro risk of the markets is still the main concern of all market players. This week's oil inventory report could likely be a primary price catalyst especially if the actual outcome is significantly different from the market projections.
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...most likely driven by the unannounced refinery shutdowns over the last week or so. I am expecting a modest build in crude oil inventories a draw in gasoline and a seasonal build in distillate fuel stocks as the summer driving season is starting to wind down. I am expecting crude oil stocks to increase by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 15.4 million barrels while the overhang versus the five year average for the same week will come in around 27.8 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 around the $17.50/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 0.5% I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year deficit coming in around 8.2 million barrels while the deficit versus the five year average for the same week will come in around 4.4 million barrels.
Distillate fuel is projected to increase by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 31 million barrels below last year while the deficit versus the five year average will come in around 26.3 million barrels. Exports of distillate fuel have been the main storyline this year with exports running around 1 million bpd.
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 mostly in the same direction as the projections. As such if the actual data is in line with the projections there will only be a modest change in the year over year comparisons for most of the complex.
I still think the oil price is overvalued and getting 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 $105 to $115 trading range. There are a lot of dynamics that will impact oil prices in the short term and the ranking of the price drivers are fluid and very susceptible to changing. The only constant for oil prices in the short term is above normal levels of volatility. Geopolitics are currently moving back into the foreground and starting to play a role in price setting once again as well as the perception of more stimulus.
I am moving my view back to neutral as the warm weather may be returning and could support prices in the short term. If so the upcoming injections could continue 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 ended the week mostly higher as shown in the following table.
Dominick A. Chirichella
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