The macroeconomics made a difference as last week came to an end for the long holiday weekend. Although the oil market was closed for the Good Friday Holiday the US government still released the monthly nonfarm payroll data and is was simply negative. The number came in at 120,000 new jobs created versus most expectations for the gain to be in the 200,000 range. The headline unemployment rate did drop by 0.1% to 8.2 but that was not a result of new job gains rather it was a result of more people giving up looking for jobs and dropping out of the job markets.
The number was bearish on all counts as it is suggesting that the fragile US economic recovery may be slowing once again. In fact the U6 rate, which tracks not only those out of work but those who have essentially given up looking for work stands at 14.5%. The data was bearish for all risk asset markets around the world including the oil complex which is currently lower by 1.5% since Thursday's close (pre-number release).
Further negative data for oil was released overnight when China's latest CPI index rose more than expected coming in at 3.6% versus forecasts at 3.3% against last month's level of 3.2%. This data is disappointing to the Chinese government who thought that inflation was under control and the central Bank would be able to start to stimulate their slowing economy. This number will likely postpone the government moving to a very aggressive easing policy until they are certain that inflation is not once again rising. This is a bearish number for the oil complex as well as the broader commodity complex. China is the main oil demand growth engine in the world and if the government is unable to aggressively stimulate this slowing economy oil demand growth is going to underperform going forward and that is bearish for oil. In fact the Chinese data is far more bearish for oil demand than the disappointing employment data out of the US as US oil demand has been in a long term downtrend which began even before the onset of the recession.
On the geopolitical front he meeting between the west and Iran begins at the end of the week in Istanbul. Whether or not it will meet the expectations of the west or the expectations of the market remains the big question of the week. Anything short of Iran changing their tune and moving more in the direction that meets the demand of the west will likely be viewed as a sign that the probability of military intervention may be increasing. I still view the geopolitics as a so called put or floor in the price of oil for the short term or until there is a lot more clarity as to how Iran will react to the demands of the west.
At the moment the main reason oil prices are still trading at the level they are at is due to the perception that a supply disruption could be possible from the evolving situation in the Middle East...in particular around Iran. On the other end of the equation the fundamentals are starting to look more bearish as oil demand growth may be starting to slow basis the bearish macroeconomic data out of China and the West. The changing landscape in the broader oil complex is moving my view back to neutral as I wait to see how the combination of new macroeconomic data coupled with the upcoming meeting with Iran turns out.
Over the last week the oil complex was mixed with crude oil and RBOB gasoline a tad higher while HO was slightly lower... all closing before the release of the US nonfarm payroll data on Friday morning. The Nymex RBOB gasoline contract was the biggest gainer in the complex last week as market participants focus on the upcoming summer driving season. Brent and WTI increased about the same amount on the week resulting in the Brent/WTI spread ending the week about unchanged. The May WTI contract increased about 0.28% or $0.29/bbl offsetting the losses from the previous week. The May Brent contract ended the week with a small increase of 0.29% or $0.36/bbl. The May Brent/WTI spread widened by just $0.07/bbl but is continuing to trade well above the trading range it was in prior to breaking out after the tensions in the Middle East and Nigeria raised the risk of an interruption in supply with the market placing that risk premium more on Brent than on WTI.
On the distillate fuel front the Nymex HO contract was about unchanged on the week even as distillate fuel inventories increased less than expected last week and as US distillate fuel exports declined on the week. The spot Nymex HO contract decreased by 0.03% or $0.0009/gal. Gasoline prices increased on the week as gasoline stocks declined. The spot Nymex gasoline price increased by 0.98% or $0.0324/gal this past week.
On the week Nat Gas futures declined once again as the inventory injection outperformed history for the fourth week in a row. The spot Nat Gas futures contract lost another 1.74% or $0.037/mmbtu on the week as it moves closer to trading with a $1 handle. Another bearish layer hit the market today when the EIA reported an injection level above most all of the expectations. The immediate reaction was to sell the number but surprisingly the decline was modest and quickly met with a modest level of short covering that is continuing as of this writing. I would not categorize the way the futures market is trading at this point in time as anything bullish in nature or the bottoming of the market . I simply categorize it as short covering heading into the long holiday weekend...nothing more , nothing less. Irrespective as to where Nat Gas futures settle today we will still be in a long term downtrend with lower prices still likely during the shoulder season.
With total storage currently at approximately 2.5 TCF that leave about 1.6 TCF until we hit the maximum storage capacity for the system. Using last year the injection season saw about 2.2 TCF of gas injected into inventory. This would mean about 4.7 TCF heading to storage which is mathematically an infeasible solution. There will be about 600 BCF of gas that right now looks like it will have no home if it is taken out of the ground. At this point in time the only place for the extra 600 BCF of gas that will be produced this year is to leave it where it is and do not produce it.
I am not sure what the producing sector is looking at that most all of us in the market are not seeing. I am surprised that there have not been announcements for significant dry gas production cuts already. I suspect at this juncture there is going to have to be another strong leg lower to get the attention of the producing sector. I still see Nat Gas trading with a $1 handle sooner than later.
I still view the fundamentals as nothing but bearish and I do not see any change in the short to medium term fundamentals as I do not think producers will make deep enough cuts anytime soon or in other words until they absolutely have no choice to do so based on logistics considerations. Nothing has changed to change my view that we will most likely see Nat Gas prices trading with a $1 handle sooner than later.
On the financial front equity markets around the world ended mostly lower for as the downside correction continues (and into the start of this week's trading). The financial markets were mostly impacted by a series of macroeconomic data in several locations around the world...in particular China that indicated that economic growth may be slowing. Global equity values decreased as shown in the EMI Global Equity Index table below.
The EMI Index decreased by 1.5% on the week. Over the last week the Index decreased in value as the euro decreased modestly while the US dollar firmed on the week. Last week the global equity markets were a bearish price driver for oil and most commodity markets. Last week was a risk off trading week for most risk asset markets with that sentiment carrying over into this start of this trading week after the bearish US data on Friday.
I am moving my view back to neutral for oil as it is once again trading below my range support of $102/bbl (basis WTI) while the data out of China is also pointing to a potential slowing of oil consumption . Geopolitics will remain the main price driver leading up the Iran/West meetings on April 13/14th but until I get more clarity as to how the meeting is likely to turn out I am more comfortable staying on the sidelines today.
I am still keeping my view at and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season. As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.
Currently markets are lower as shown in the table below.
Dominick A. Chirichella
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