Oil had a monster day on Thursday even after a relatively mildly bearish oil inventory snapshot. Oil is going a bit parabolic all on a four letter word...IRAN. Also we can throw in a dusting of Syria into the geopolitical mix and what we have is the spot WTI contract approaching the $110/bbl mark while the spot Brent contract is hovering around $124/bbl. When I look around the world all I can say about oil is nothing good can come from oil prices in triple digits except if you are a producer and/or are a net long speculator. It is inflationary and will begin to have a negative impact on consumers around the world if it has not already started to do so.
It is actually very interesting that oil is continuing to surge and yet global equities are still hovering around their highs for the year. At the current price of oil inflation risk is rising. At the current price of oil consumer non-discretionary funds are going to pay for higher gasoline prices and not for normal purchases of goods and services. At the current price of oil corporate earnings are starting to be impacted as the cost of goods sold is also rising. These are just a few of the areas that are being negatively impacted by the surging price of oil. Bottom line the global risk asset markets will eventually work in the negative ramifications of rising oil prices and when it does the downside correction in overbought equities (for example) will undergo a modest round of profit taking selling. For now the risk asset bulls are still clearly in charge of the markets.
As I have been discussing for weeks the meteoric rise in oil prices is predominately driven by Iran and the potential or at least the perception that a disruption in crude oil supply can occur. So far there is no shortage of oil from anything going on in and around Iran. It is all a perception and thus the growing risk premium in the price of oil. My comments are not meant to mean there will never be a supply interruption. Rather there is just not one now but there are many scenarios that can occur that would result in a supply disruption. For example preemptive military strikes by Iran and/or military strike by Israel on Iran's nuclear facilities. Either one of those scenarios is likely to result in oil prices quickly exceeding the all time record highs made back in July of 2008. Hopefully for the consuming world they remain just possible scenarios.
The sanctions continue to grow against Iran as even a Turkish Bank that normally processes payments for Iranian oil into Turkey may stop processing payments by July (in line with the EU embargo of Iranian crude oil purchases). It is clear that Iran is running out of new customers for its oil and at some point (if not already) some Iranian oil will be left behind. How much will be a direct result of how aggressive the Chinese and Indian oil buyers are over the next several months or so. The US is pushing India to replace their Iranian oil purchases and according to a story in Bloomberg the US is offering to help India find replacement barrels. For now the Iranian embargo is still a logistics exercise for both sides of the embargo. That said the price of oil has risen by about $10/bbl since the EU announced its embargo as market participants continue to add to the risk premium as discussed above. Of interest even if Iran has left some barrels behind their revenue stream is still not being impacted as they are selling their oil for $10/bbl more than they were before the embargo.
From a technical perspective WTI does not have much resistance until we get to the $110/bbl area and barring any major change in market sentiment over the short term that level is likely to be tested in the next several trading sessions. On the Brent side of the equation there is not much resistance until around $126/bbl. We are clearly back into a buy the dip mode for oil with fewer and fewer sellers willing to step up and take the other side of the risk trade. Oil prices are overbought but what technical history has taught us many times is a market can remain overbought for an extended period of time while in a strong trend. Oil is certainly in a strong uptrend and all signs point to the trend continuing with only short and shallow downside corrections or bumps in the road.
As mentioned above global equities have pretty much been ignoring the surging oil prices as shown in the EMI Global Equity Index table below. The Index is up about 0.5% for the week resulting in the year to date gain widening to 13.2%. The Index has now recovered all but 2% of its 2011 loss and in less than 2 months! Needless to say that has been a very strong trend that has been driven by better economic data out places like the US, a resolution to the Greek default risk (at least for the short term) a massive amount of short covering...especially in European and some Asian equity markets, a bit of catch up buying by the fund industry and a tad of new investment flow. Much like I discussed about oil prices the global equity markets are also very overbought and susceptible to a round of profit taking selling. The catalyst will likely be a realization that higher oil prices are truly a negative for the global economy. I think we are getting close to that realization. Yesterday's EIA inventory report was mixed to slightly bearish as it showed a build in total stocks, a surprise build in crude oil stocks. a smaller than expected draw in distillate fuel inventories and a smaller than projected decline in gasoline stocks. Implied demand decreased strongly as refinery utilization rates increased on the week to 85.5% of capacity an increase of 1.5% 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 increased modestly on the week by 3.3 million barrels after increasing over 4.0 million barrels the previous week. After 46 weeks with the year over year status in a deficit position there is now a small surplus of 1.3 million barrels compared to last year. The current level is about 33.4 million barrels above the five year average for the same week.
Crude oil inventories increased versus an expectation for a modest draw. With an increase in stocks this week the crude oil inventory status versus last year is still showing a deficit of only around 6.0 million barrels while the surplus versus the five year average for the same week narrowed to around 7.0 million barrels. PADD 2 crude oil inventories decreased by about 0.6 million barrels while Cushing, Ok crude oil inventories declined by about 0.3 million barrels on the week.
Crude oil inventories in the mid-west region of the US have been in a decline and are still at levels not seen since 2010 when the Brent/WTI spread was trading at significantly lower levels. The modest decrease in inventories this week which is mostly neutral coupled with the evolving geopolitical events surrounding Iran have all contributed to the Brent/WTI holding steady around the $12/bbl level (premium of Brent over WTI).
Distillate stocks decreased modestly versus an expectation for a large seasonal draw. Heating oil/diesel stocks decreased by only 0.2 million barrels. The year over year deficit came in around 16.4 million barrels while the five year average surplus widened to about 2.5 million barrels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season starts to get much colder the current level of exports will likely continue especially with the cold spell in Europe.
Gasoline inventories declined marginally as a result of all of the unscheduled refinery issues of late. Total gasoline stocks decreased by about 0.6 million barrels on the week versus an expectation for a draw of about 0.9 million barrels. The deficit versus last year came in at 6.8 million barrels while the surplus versus the five year average for the same week held steady at about 4.1 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 but one that is biased to being marginally bearish on the week. WTI is still trading above its most recent resistance level of $104/bbl (now a support level with $110/bbl the next level of resistance. Brent has also breached its resistance level of $120/bbl yesterday. But as with WTI... Brent is also settling into a new short term trading range of around $119/bbl to $126/bbl. Oil continues to be driven by the evolving geopolitics of the Mideast...in particular Iran with just about all of the other normal prices drivers taking a secondary role...including fundamentals. I am keeping my view at cautiously bullish and keeping the caution flag flying to remind all that the market is still susceptible to a modest round of profit taking selling in the short term. I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally.
With winter winding down yesterday's mildly bullish Nat Gas inventory report was discounted immediately after its release as participants seemed to quickly focus on the bigger picture...unlike last week. The bigger picture that is continuing to evolve is the oversupply is not going anyplace quick and the end of the winter heating season inventories are still very likely to be at an all time historical record high of 2.2 to2.3 TCF. If the end of season inventories are anywhere near the projections and with production cuts still very minimal the shoulder season is going to be a very bearish timeframe and a period that could result in another test of the $2 to $2.25/mmbtu support level. In addition the upcoming injection season is likely to hit storage capacity constraints much sooner than normal..end of October to early November.
Nat Gas futures (basis the spot or March contract ) have been trading in a wide range of $2.25 to $2.85/mmbtu and as it looks at the moment when the March contract expires on March 27th the final price for this contract is likely to remain within the aforementioned trading range. The last of the bulls are slowly working their way out of the market as the weather forecast for the rest of the winter heating season is projected to remain warmer than normal which should result in the weekly inventories returning to the underperforming pattern they have been in for most of the winter.
Yesterday's EIA report was modestly bullish from every angle one can look at including when compared to the market consensus. The withdrawal was slightly more than the consensus expectations and the report is modestly bullish as the EIA report had a net withdrawal (166 BCF) significantly above last year and modestly above the five year average for the same week. The net withdrawal was above the consensus projection for a withdrawal of 158 BCF. However, the market participants reacted to the data in a bearish manner and remain that pattern as of this writing. SO far today has been a buy the rumor, sell the fact kind of trading pattern. The inventory surplus narrowed versus both last year and the more normal five year average also. The current inventory level is now 745 BCF above the five year average.
Currently markets are mostly higher as shown in the following table.
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Best regards, Dominick A. Chirichella firstname.lastname@example.org Follow my intraday comments on Twitter @dacenergy.