The main economic news item of the day (so far) is the EU is now officially out of recession. The data showed that the EU exited recession in Q2 led by Germany and France. Q2 GDP in the 17 nation euro area expanded by 0.3 percent after contracting by 0.3 percent the previous quarter. The latest GDP came in better than the 0.2 percent market consensus. Compared to a year earlier the economy contracted by 0.7 percent.
The risk asset markets are not reacting very strongly to the latest GDP data out of the EU as market participants view today's data as only the early stages of growth and one that could easily return to contraction as the ongoing debt issues of some of the EU member countries are still a factor. In addition one quarter of growth does not immediately translate to growth in commodity consumption like oil. In fact with refinery economics on the defensive in Europe refinery utilization rates are still below normal for this time of year with crude oil demand for the region also on the low end of normal.
Europe has a long way to go before it is on a sustainable growth pattern. Much like the US economy which has been in a growth pattern the rate of growth of the US has continued to be below normal for this stage of the recovery so far. A similar pattern is likely to emerge in Europe when the growth rate is consistent.
The oil complex is currently in negative territory as oil traders focus more attention on the weekly inventory data and less on the fact that the EU economy showed a modest level of growth. Last night's API data showed larger than expected builds in refined products and a smaller than expected decline in crude oil stocks with refinery run rates declining. In addition there is a sign that additional oil terminals in Libya may restart today after a few resumed operation already.
On the tropical front a new weather pattern has now materialized and has been picked up by the NOAA models. At the moment it is a weak trough of low pressure extending from the southwestern Caribbean Sea northeastward to near Jamaica. It is expected to move north-northwest toward the Yucatan Peninsula over the next several days. At the moment it is still a low probability event having only a 20 percent chance of becoming a tropical cyclone over the next forty eight hours but a medium or 30 percent chance of strengthening over the next five days as the environmental conditions are expected to be marginally favorable for additional organization. This weather pattern remains on our radar.
Global equity markets continued to add value over the last twenty four hours. The EMI Global Equity Index increased by 0.6 percent with the year to date loss narrowing to 1.4 percent or the lowest loss level since the end of May of this year. Seven of the ten bourses in the Index are in positive territory for the year with six of them showing double digit gains for 2013. Hong Kong is on the cusp of moving into positive territory with both Brazil and China narrowing its year to date loss so far this week.
Global equities have been a positive price driver for the oil complex as well as the broader commodity complex. However, the US dollar Index has continued to increase and has now gained ground for the fourth trading session in a row. The rising US dollar has been negating the positive support coming from the equity markets and thus the externals are an overall neutral for the oil complex.
Tuesday's API report was mixed with a draw for crude oil and builds in both gasoline and distillate fuel inventories built. Total crude oil stocks decreased less than the expectations by 1 million barrels as crude oil imports increased modesty while refinery run rates decreased by 0.7 percent. The API reported a build in distillate fuel inventories and in gasoline stocks that were above the expectations.
The oil complex is lower as of this writing and heading into the EIA oil inventory report to be released at 10:30 AM EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. On the week gasoline stocks increased by about 1.7 million barrels while distillate fuel stocks increased by about 1.1 million barrels.
The API reported Cushing crude oil stocks decreased strongly by 1.4 million barrels. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the Brent/WTI spread but as I have been discussing in the report the market is focusing more of its attention on supply interruptions out of the North Sea as well as from several international locations like Libya.
My projections for this week's inventory report are summarized in the following table. I am expecting another modest draw in crude oil inventories with a build in both gasoline and distillate fuel stocks.
I am expecting crude oil stocks to decrease by about 1.3 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 4.2 million barrels while the overhang versus the five year average for the same week will come in around 19.1 million barrels.
I am expecting crude oil stocks in Cushing, Ok to decrease strongly for the seventh week in a row and continue its destocking trend. This will be bearish for the Brent/WTI spread as the fundamentals are in play and are driving the spread (see above for a more detailed discussion).
With refinery runs expected to increase by 0.2 percent I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 0.5 million barrels which would result in the gasoline year over year surplus of around 20.4 million barrels while the surplus versus the five year average for the same week will come in around 14.2 million barrels. With a major portion of the US summer driving season already in the history books gasoline supplies will be more than adequate going forward as total gasoline stocks remain well above both last year and the so called normal five year average.
Distillate fuel is projected to increase by 0.5 million barrels even as exports of distillate fuel out of the US Gulf remains robust. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2.8 million barrels above last year while the deficit versus the five year average will come in around 22.1 million barrels.
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 mixed with some differences compared to last year's changes. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for most everything in the complex.
I am maintaining my oil view at neutral and my bias back at neutral for the short term as the downside correction seems to be losing momentum once again. The strong destocking pattern of crude oil in the US Midwest may start acting as a supporting catalyst once again.
I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture has shifted as the temperatures across the US do not appear to be moving back to warmer than normal weather anytime soon.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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