The latest FOMC meeting minutes put a bit of a damper on the fiscal cliff rally as most risk asset markets are flat to lower with the oil complex falling modestly. Yesterday's release of the US Fed FOMC minutes from its last meeting indicated that there was some disagreement among members as to when the massive money printing or quantitative easing should end. Some members would like to slow or end the program before the end of 2013. This has put a bit of a negative tone over the commodity markets as an end to the $85 billion dollar per month of easing would certainly reduce the risk of inflation and thus a negative for higher oil and commodity prices.
The minutes surprised many investors who were still of the view that there was no end date yet discussed. The FOMC still intends to keep short term interest rates near zero until the unemployment rate falls below 6.5% as long as inflation remains below 2.5%. In spite of the comments from some members on an end date for QE the overall Fed policy will remain very accommodative throughout 2013 and possibly beyond. The Fed remains a bullish or supportive price driver for equities and most risk asset markets.
Today the market will quickly switch move its attention from the fiscal cliff deal even further into the background when the US Labor Department releases the market moving monthly nonfarm payroll data and headline unemployment rate at 8:30 AM EST. The market is looking for a net jobs gain of about 160,000 jobs with some forecasters talking even higher levels after yesterday's much larger than expected ADP private payroll number of 215,000 new private sector jobs. The consensus is expecting the unemployment rate to hold steady at 7.7%. The jobs data is always a very important and widely discussed macroeconomic data point and today's releases will be no different especially since the US Fed has specifically linked their short term interest rate strategy to the unemployment rate. If the actual number is in sync with the forecasts I would expect a somewhat muted and neutral reaction in the market place. The actual outcome is going to have to be a modest deviation from the forecasts for the markets to react strongly in either direction.
In addition the Institute for Supply Management will release its services index at 10 AM EST... which covers about 90% of the US economy. The market is expecting the Index to come in at 54 for December versus 54.7 in November. Much like the manufacturing index a level above 50 indicates this sector is expanding.
Global equity markets have been relatively quiet overnight and ahead of today's employment data from the US. The EMI Global Equity Index (shown below) is higher by 2.8% for the week (and the year to date) and starting out 2013 much like it did in 2012. Brazil currently is at the top of the list of indices with Canada and China still holding the bottom... although they are both marginally positive for the year. Global equities have been a positive for the broader commodity complex but as described above the Fed minutes have offset the support coming from the equity sector at the moment.
The short term uptrend that has been in play since early December for both the spot WTI and Brent futures contracts is starting to lose its momentum. Both contracts are approaching an intermediate technical channel support suggesting that lower prices may be on the horizon in the short term. Although they are both still technically in an uptrend they both failed to follow through to the upside during the fiscal cliff deal rally that began at the end of last week. I am changing my bias to neutral to see if the aforementioned support area holds over the next day or so.
On the fundamental from last night's API inventory data was mixed while Reuters is reporting that Iran's top nuclear negotiator indicated that Iran has agreed to talks with the six major powers over this nuclear program sometime in January with no specific time or date yet to be determined. Another round of meetings would certainly lower the geopolitical risk premium in the price of oil... at least until the talks take place. If the new round of talks proceed as they have for the last 10 years then not much will come out of the talks and the risk premium will once again start to widen as the market would then switch its attention back to the prospects for military action by the Israelis and/or others. On the other hand with the sanctions actually impacting the flow of oil out of Iran this round of talks could possibly turn out to be much more constructive than any of the previous negotiations that have taken place over the years. For now the market is viewing the possibility of another round of talks as biased to bearish side for oil.
The API report was mixed but biased to the bearish side and not in sync with the range of expectations. Crude oil showed a significantly larger than expected draw compared to expectations for a more modest draw. Gasoline showed a larger than expected build in inventory while distillate fuel stocks surged versus an expectation for a small build. The API reported a draw (of about 12 million barrels) in crude oil stocks versus an industry expectation for a modest draw as crude oil imports decreased even as refinery run rates decreased by 1.1%. The API reported a strong build in distillate and a build in gasoline stocks.
The API report is bearish as the large draw in crude oil stocks is primarily a function of end of the year LIFO or inventory management that normally happens every year. Over the next several weeks I would expect to see crude oil imports and stocks to rebuild as the industry readjusts back to more normal inventory operating levels. That said the fact that there was such a large deviation from the expectations will make this morning's EIA inventory report much more interesting. The oil market is lower heading into the US trading session and ahead of the EIA oil inventory report at 11 AM today. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. The API reported a draw of about 12 million barrels of crude oil with PADD 2 stocks increasing by 0.5 million barrels while Cushing stock increased by 0.6 million barrels. On the week gasoline stocks increased by about 3.3 million barrels while distillate fuel stocks decreased by about 6.7 million barrels.
With geopolitics less of an issue or price driver than it was the last month or so the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest draw in crude oil inventories, a build in gasoline and in distillate fuel stocks even as the weather was winter like over the east coast during the report period. I am expecting crude oil stocks to decrease by about 0.7 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 42.9 million barrels while the overhang versus the five year average for the same week will come in around 50.2 million barrels.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.5 million barrels which would result in the gasoline year over year surplus coming in around 6.9 million barrels while the surplus versus the five year average for the same week will come in around 11.7 million barrels.
Distillate fuel is projected to increase by 1.0 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 20 million barrels below last year while the deficit versus the five year average will come in around 24.4 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 not in directional sync with this week's projections. 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 just about everything in the complex.
I am maintaining my view at neutral and moving my bias back to neutral as the current fundamentals are still biased to the bearish. In addition the technicals are indicating that the upside momentum has eased as the market has now moved toward the intermediate channel support level over the last two days. 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 cautiously bearish as the fundamentals and technicals are now suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to possibly 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 report one day late due to the New Year's Holiday on Tuesday. The report will be released this morning at 10:30 AM. This week I am projecting a modest withdrawal of 120 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a significant amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 77 BCF and the normal five year net withdrawal for the same week of 111 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and 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 below 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 surplus will narrow to about 68 BCF. The surplus versus the five year average for the same week will also narrow to around 404 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 68 BCF to about a 165 BCF net withdrawal with the Reuters poll consensus pegged at a draw of 127 BCF.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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