As it stands at the moment many of the risk asset markets...including oil may be ending the week with gains. The current week has seen mixed signals but in general the signals were biased to the supportive side of the equation. Starting with Europe all 17 EU member counties have now passed the ESFS bailout fund ...including Slovakia. A step in the right direction but many steps are still required before the EU leadership can actually say they have a long lasting and durable solution to all of the sovereign debt issues in the EU. In addition G20 finance ministers are meeting (ahead of next month's meeting) in Europe today and are discussing an expansion of the IMF's lending powers as part of a global G20 agreement to be presented at next month's meeting. On the negative side S& P downgraded Spain for the third time in three years this morning while Fitch downgraded two major banks and put several others on negative watch. But for today progress is still outweighing the downgrades.
In Asia China's latest CPI number came in a tad below last month (by 0.1%) showing that year on year inflation is at 6.1%. The combination of the Chinese government operating under an economic tightening policy for over a year along with the slowing of the economic recovery in the developed world may be finally starting to impact China (and other Asian economies) to the point where the Chinese government may begin to move toward a more accommodative economic policy.
The Monetary Authority of Singapore moved in that direction today as it cut its growth forecast and said it will slow currency gains, the first monetary easing policy since 2009. The MAS said it will reduce the pace at which its currency strengthens and move to a more gradual appreciation rate. If the developing world economies begin to further move toward more easing it could be a bit of a welcomed jolt for the global economy and one that would be cheered by commodity producers around the world including OPEC and other oil producers as it would be a bullish move for commodity consumption and prices over the medium term.
Also most of this week's round of recurring macroeconomic data coming out of the US and Europe has been mostly better than expected (albeit still not very robust). This has resulted in less discussions as to the imminent movement to a double dip recession in the US and Europe and as such it has started to put a floor on the sell-off experienced over the last several months suggesting that oil and most other risk asset markets may be entering a consolidation pattern while market players await clearer signals as to its next major move. As I have been discussing for weeks it has been and it still remains all about Europe. If the EU leadership can convince the markets that they have control of the debt problems there will be a strong rally in risk asset markets heading to the end of the year (and possibly beyond). If not asset values...including oil will be susceptible to another strong move to the downside.
The slow change that seems to be evolving in the overall market sentiment has resulted in most global equity markets adding value for the week (so far) as shown in the EMI Global Equity Index table below. With trading still underway in the west the EMI Index has already gained 3.7% on the week or the largest weekly gain so far this year. The Index has narrowed its year to date loss to 16.6%...below the 20% bear market threshold but certainly still not out of the woods. The performance of the global equity markets have a high correlation to global GDP. With the improvements this week the signal the market is sending may be that although the economic situation is still bad it may not be as bad as thought just weeks ago. For the moment the global equity markets are a positive for oil prices as well as the broader commodity complex.
Yesterday's oil inventory report was mixed with crude oil mostly neutral while refined products markets were mostly bullish. Even with the uncertainty surrounding the financial markets the fundaments played a role in price movement for the second week in a row. The bullishness spread across the refined product sector with the biggest decline coming from gasoline oil as production declined sharply on the week. Beyond that distillate inventories declined modestly on the week as implied demand held steady and US refiners seemingly started to switch to a more max distillate production mode (at the expense of gasoline). With this week's decrease of 1.4 million barrels total commercial stocks in the US have still grown by almost 50 million barrels over the last few months.
The market viewed the report as bullish right from the moment the report was released and into this morning so far. The inventory report showed a modest decrease in total stocks, and unexpected decline in gasoline and distillate inventories along with a modest build in crude oil stocks as implied demand decreased marginally and refinery utilization rates decreased strongly on the week to 84.2% of capacity a decrease of 3.5% in refinery run rates. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
Total commercial stocks of crude oil and refined products decreased on the week by 1.4 million barrels. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 29th week in a row. The year over year deficit narrowed to 61.1 million barrels while the overhang versus the five year average for the same week narrowed to 8.9 million barrels.
Crude oil inventories increased versus an expectation for a larger build. With an increase in stocks this week the crude oil inventory status versus last year is showing a narrower deficit of around 22.9 million barrels while the surplus versus the five year average for the same week widened to around 7.4 million barrels. PADD 2 stocks were about unchanged on the week while Cushing stocks built by about 0.5 million barrels. Crude oil inventories in this region of the US have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI spread was trading at significantly lower levels. That said the spread has been widening for most of this week as several commodity indices are in the process of rebalancing their weightings of both Brent and WTI (increasing Brent, decreasing WTI).
Distillate stocks decreased versus an expectation for a small build. Heating oil/diesel stocks decreased by 2.9 million barrels as exports remain robust on the week. The year over year deficit widened to 18.2 million barrels while the five year average overhang narrowed slightly to 4.7 million barrels. As shown in the following chart published by the EIA yesterday exports of distillate fuel from the US and in particular from the US Gulf Cost have been steadily growing over the year with the pace of exports accelerating over the last year or so. In fact total distillate fuel exports are approaching 900,000 barrels per day or almost the equivalent of 25% of US consumption of distillate fuels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season comes in much colder than any of the expectations the current level of exports will likely continue.
Gasoline inventories decreased strongly on the week versus an expectation for a build in stocks. Total gasoline stocks decreased by about 4.1 million barrels on the week versus an expectation for a build of about 0.8 million barrels. The deficit versus last year widened to 8.6 million barrels while the surplus versus the five year average for the same week narrowed to 0.7 million barrels.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have presented a mixed categorization with gasoline and distillate as bullish while crude oil and jet fuel was mostly neutral. The fact that crude oil imports increased and refinery utilization rates declined strongly resulted in the modest build in crude oil stocks. But even with that impact the build was smaller than most of the projections.
With WTI now trading back above the $85/bbl level I continue to maintain my bias on the bullish side with a caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data due out next week is negative or if any of the 30 second news snippets surrounding Europe are bearish...especially around the G20 finance ministers meeting taking place right now. The market is in a bit of a profit selling mode as well as the beginning stage of consolidating.
Yesterday's inventory was bearish adding to Wednesday's bearish winter weather forecast along with a plethora of other bearish price drivers. Although prices finished the day in positive territory it was nothing other than a round of short covering that is likely to reverse in the next day or so. I still expect futures prices to test the next support level of $3.40 in the short term. As such I am keeping my overall view at cautiously bearish.
The bearish Nat Gas data points keep coming...almost on a daily basis. Yesterday the EIA reported an injection level of 112 BCF well above all of the expectations as well as last year and the five year average. The high injection level was a surprise but much as what occurred last Thursday the fact that the market is still traded in positive territory for the session was an even bigger surprise. Another day of buy the rumor and sell the fact as short covering can be the only explanation as to why Nat Gas futures prices were higher. There is nothing that is currently suggestive that Nat Gas prices are near a bottom nor are they ready for any reversal in the underlying trend.
Currently as a new day of trading gets underway in the US markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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