The market mostly discounted the huge build in crude oil in the mid west area of the US as well as the eight weekly build in gasoline stocks and rather focused on perception that oil fundamentals will improve going forward. Supply continues to outstrip demand but the market seems to only focus on the demand side of the equation improving as the global economy improves across 2013. Even OPEC acknowledged in their monthly oil report yesterday that demand is slowing as the main result OPEC reduced crude oil production in the later part of 2012.
Tomorrow we get a snapshot of the state of the main economic and oil demand growth engine of the world... China. The market is expecting fourth quarter GDP grew by 7.8% compared to the same time frame a year ago. If the actual number is in sync with the expectations it will be an increase from third quarter GDP of 7.4%. China has been aggressively easing its monetary policy as well as increasing its investment pace within the country. As long as inflation stays in check China is likely to continue with an easy money policy as well as aggressive infrastructure investments to bolster the economy and offset the slow growth of its two main export markets...Europe and the US.
Technically WTI is still hovering near the upper end of its trading channel while Brent lost some of its upside momentum this week and has dropped back to the middle of its upward trading range. The market seemed to be unwinding long Brent/WTI spreads yesterday as the expanded Seaway pipeline is now pumping at 400,000 bpd. Yesterday's move was a bit surprising as both PADD2 and Cushing, OK crude oil inventories surged higher on the week and are sitting at all time highs. Overall the market is well supplied with demand still lackluster. I would be very cautious trading from the long side at the moment.
Global equities were about unchanged over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index is still higher by 0.1% for the week with the year to date gain holding at 1.9%. All ten bourses in the Index are still in positive territory for 2013 with the equities trading pattern still mostly in sync with how 2012 started out. Global equities have been mostly a positive price driver for the oil complex as well as the broader commodity markets.
Yesterday's EIA inventory report was neutral to bearish as total commercial stocks increased modestly on the week. Overall I would categorize the report as biased to the bearish side as total commercial stocks increased even as crude oil inventories and imports decreased. Refinery utilization rates decreased strongly by 1.2% on the week to 87.9% of capacity. 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 increased by 3.5 million barrels. The year over year surplus came in at 51.9 million barrels while the surplus versus the five year average for the same week held at 70.5 million barrels.
Crude oil inventories decreased (by 1 million barrels) versus a market expectation for a gain. Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. With the decrease in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 29.1 million barrels while the surplus versus the five year average for the same week came in around 38 million barrels. Crude oil imports declined on the week as the industry readjusts after managing their yearend inventory levels.
PADD 2 crude oil inventories surged by about 2.3 million barrels while Cushing, Ok crude oil inventories also increased by about 1.8 million barrels on the week. The large gain in crude oil inventories in PADD 2 and in Cushing is bullish for the Brent/WTI spread. The March spread is trading around the $15.10/bbl level as of this writing and at the lowest level since mid September of 2012. As mentioned above the market has discounted the large builds this week in PADD2 and Cushing and is focusing on the expanded capacity from Seaway and the bearish impact that will eventually have on the Brent/WTI spread.
Distillate stocks increased for the third week in a row versus an expectation for a smaller build even as refinery run rates decreased by 1.2%. Heating oil/diesel stocks increased by 1.7 million barrels on a week that experienced warmer than normal temperatures along the highly populated north east. The year over year deficit narrowed to 15.6 million barrels while the five year average deficit also narrowed to about 17.2 million barrels. Since mid December distillate stocks have risen by about 16 million barrels narrowing the year over year deficit to the lowest levels in long time.
Gasoline inventories continue to grow increasing more than the expectations for a smaller build. Total gasoline stocks increased by about 1.9 million barrels on the week versus an expectation for a smaller build. The surplus versus last year widened to 7.5 million barrels while the surplus versus the five year average for the same week also widened to about 13.5 million barrels. Gasoline inventories have built by about 35 million barrels since the middle of November.
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 bearish categorization on the week for everything in the complex except crude oil. Overall this week's report was biased to the bearish side as total stocks are once again back to increasing.
I am maintaining my view at neutral and keeping my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are still suggesting that the market could be setting up for a breakout move to the upside as both WTI and Brent moved above their respective channel breakout levels. There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil.
I am maintaining my Nat Gas view at neutral with an eye toward the upside if we get further follow through buying and supportive weather forecasts. I now anticipate that the market is less likely to test the $3/mmbtu support level if the actual temperatures are in sync with the latest NOAA forecasts. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 17th at 10:30 AM. This week I am projecting an average withdrawal of 145 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced only a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 89 BCF and the normal five year net withdrawal for the same week of 144 BCF. Bottom line the inventory surplus will narrow week versus last year and hold steady compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year and at about the small level as the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 143 BCF. The surplus versus the five year average for the same week will come in around 318 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 120 BCF to about a 155 BCF net withdrawal with the Reuters consensus looking for a new withdrawal of 136 BCF.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.