Some of the uncertainty that was looming over all of the markets this week is now in the background. The OPEC meeting ended with a rollover agreement (as I suggested) with the group kicking the can down the road for a year on the election of a new Secretary General. A view that the economy is starting to show signs of stabilization coupled with the main oil demand growth engine of the world... China now projected to show its oil demand growth growing at a faster pace than previously projected (latest IEA monthly report) was enough for OPEC to take a wait and see approach to production levels. This will be an issue that will most likely have to be dealt with sometime during the first half of the year especially if supply continues to outstrip demand.
Today in the EU another tranche of aid was approved for Greece while the EU Finance Ministers finally agreed to put the ECB in charge of all of the banks. Greece is now moving further into the background and will remain a secondary market driver for the next several months or until the next Greece crisis emerges. The agreement to put the ECB in charge of all of the banks will move the EU one step closer to financial integration. The agreement opens the door for the EU's financial firewall to now provide direct bailout to the banks under the direction of the ECB. As is always the case with the EU there are still many details that will have to be worked out prior to the start date of the new ECB authority on March 1, 2014. Overall pushing Greece into the background coupled with the new agreement by the EU Finance Ministers is a positive for the EU economy as well as the EU equity markets at least for the short term.
In the US at least one of the major uncertainties is out of the way... the outcome of the last US FOMC meeting of the year. As expected the Fed replaced Operation Twist with a new or additional round of quantitative easing... let's say QE3a or QE4 that will entail the buying of another $45 billion dollars of long term Treasury instruments. Thus starting in January the Fed will be printing about $85 billion dollars per month to provide liquidity to the long term bond markets... both mortgage and treasury instruments.
The Fed also added more transparency to their programs by tying the unemployment rate to interest rates and QE. Unlike most Central Banks around the world the US Central Bank has a dual mandate that includes an objective to stabilizing the US economy at full employment. In his presser yesterday Chairman Bernanke called the current state of the US labor market... an enormous waste of human and economic potential. This is the first time the Fed is announcing the linking of their programs to employment in the public domain.
They are linking their interest rate outlook to economic thresholds (which has always been the case with no details in the public domain). They said publically for the first time that rates will remain low as long as the unemployment rate remains above 6.5% and if the Fed projects inflation of no more than 2.5% one or two years into the future. The Fed does not expect the unemployment rate to hit their threshold until 2015. So for the moment the Fed will be providing a lot more liquidity into the US economy which overall is a positive for more risk asset markets...although the reaction has been somewhat muted since the announcement on what I would describe as a buy the rumor, sell the fact action in the equity and commodities trading pits... as the Fed action was mostly expected.
Although the Fed uncertainty is now out of the market the looming fiscal cliff trigger is not. Although both sides have exchanged new proposals the Republicans indicated yesterday afternoon that they are still far apart on an agreement even as the President once again indicated that a deal will be reached. I am still expecting a deal and as I have discussed on numerous occasions the markets are going to be impacted by the 30 second news snippets hitting the media airwaves from both sides until a deal is finally reached. I still expect a deal before the Christmas holiday breaks for the politicians in Washington DC. Overall the looming fiscal cliff remains a negative for the markets in the very short term or at least until the next positive comments hit the media airwaves.
The EMI Global Equity Index was little changed over the last twenty four hours as a very light round of profit taking selling hit after the US Fed announcement. As shown in the following table the EMI Index was about unchanged with the week to date gain still sitting around 1.4% resulting in the gain for 2012 holding at 9.5% or the highest level since April of this year. Global equities have staged an impressive rally since bottoming out in the middle of November especially with all of the headwinds and geopolitical events that have been looming overhead during that time frame. The short term trend for most of the global equity markets has been in an uptrend as most all of the clouds overhanging the market have been somewhat settled except for the US budget deal. Global equities have been a positive price driver for the oil complex as well as the broader commodity markets.
Yesterday's EIA inventory report was simply bearish as total commercial stocks increased strongly on the week. Overall I would categorize the report as biased to the bearish side as total commercial stocks increased modestly along with an increase in crude oil inventories as crude oil imports increased on the week. In addition refinery utilization rates decreased slightly by 0.2% on the week to 90.4% 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 5.9 million barrels. The year over year surplus came in at 44.5 million barrels while the surplus versus the five year average for the same week widened to 46.3 million barrels.
Crude oil inventories increased (by 0.8 million barrels) and above the market expectations for a decline. 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 increase in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 36.5 million barrels while the surplus versus the five year average for the same week came in around 41.8 million barrels. Crude oil imports increased modestly on the week.
PADD 2 crude oil inventories surged by about 1.6 million barrels while Cushing, Ok crude oil inventories also increased by about 1.2 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 Jan spread is trading near the $23/bbl level as of this writing and approaching the contract high for the spread made in the third week in November.
Distillate stocks increased above the range of expectations even as refinery run rates decreased by 0.2%. Heating oil/diesel stocks increased by 3 million barrels on a week that experienced modestly colder than normal temperatures along the highly populated north east. The year over year deficit came in around 23 million barrels while the five year average remained in a deficit of about 28.2 million barrels.
Gasoline inventories surged well more than the expectations for a much smaller build. Total gasoline stocks increased by about 5 million barrels on the week versus an expectation for a smaller build. The deficit versus last year now switched to a surplus of 2.1 million barrels while the surplus versus the five year average for the same week widened to about 7.4 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 bearish categorization on the week for everything in the complex except jet fuel. 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 and bias at cautiously bearish as the fundamentals are still biased to the bearish side as well as the technicals. At the moment 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. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. However, the fundamentals, the markets view of the global economy, the US fiscal cliff negotiations and less so the geopolitics will be the price drivers in the short term pretty much in that order. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... even after last week's bullish inventory snapshot. 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 early stages of the winter heating season and currently those forecasts are all still mostly bearish.
This week the EIA will release its inventory report on its normal schedule... on Decembers 13th at 10:30 AM. This week I am projecting a small withdrawal of 5 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a minimal amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 79 BCF and the normal five year net withdrawal for the same week of 113 BCF. Bottom line the inventory surplus will widen significantly 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 significantly below 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 widen to about 41 BCF. The surplus versus the five year average for the same week will also widen to around 276 BCF. This will be a bearish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of a 1 BCF build to about a 30 BCF net withdrawal with the consensus looking for a net withdrawal of 4 Bcf (Reuters poll).
Markets are mostly lower into the US trading session as shown in the following table.
Dominick A. Chirichella
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