Risk off and a lot more risk off was the theme that prevailed in yesterday's trading markets. The combination of more rumors circulating around Europe (France was on the cusp of being downgraded) and an OPEC meeting that ended with basically no change and as expected by the market was enough to send global equities lower along with a huge decline of over $5/bbl in oil prices. Actually what OPEC did was to increase its ceiling to 30 million barrels per day...the first change since the end of 2008... or to bring it to the same level of current OPEC production. The outcome does not add any additional oil to the market but only legitimizes the current production level within OPEC. The OPEC meeting was actually a neutral but yet it was enough to result in a massive sell-off in oil prices that also garnered steam from a mixed oil inventory report as well as a strongly declining euro (rising US dollar).
On the macroeconomic front China's PMI index rose to 49 in December from last month's 47.7 according to data released by HSBC and Markit Economics. An improvement over last month but still below the contraction/expansion threshold level of 50. At this level it appears that China's economy is not collapsing but China is still likely to aggressively move to an accommodative monetary policy and even possibly add some stimulus along the way in my opinion.
The global equity markets continued to inch closer to bear market territory as shown in the EMI Global Equity Index table below. The Index is now down by 2.6% on the week resulting in the year to date loss widening to 16.4%. The US remains the only bourse still showing positive results for 2011 while Paris, Hong Kong and China are all back in bear market territory. The global equity markets are continuing to trade based on a relatively bearish market sentiment and one that is suggesting that the situation in Europe is not going to get resolved anytime soon while growth in the US is slow at best. Needless to say the global equity markets have been a negative price driver for oil as well as the broader commodity complex.
While the world was focused on Europe and OPEC the outcome of this week's oil inventory report was somewhat muted. Yesterday's oil inventory report was bearish for refined products and neutral to bullish for crude oil...although the main reason for the decline in crude oil stocks was due to a big decline in imports. With Europe still dominating the media airwaves the oil market added to an already declining market after the report was released. With the uncertainty surrounding the financial markets (especially in Europe) crude oil fundaments only played a small part in price movement on Wednesday and into this morning so far. Total commercial stocks increased modestly led by another huge build in gasoline inventories
The inventory report showed a modest build in total stocks, an as expected build in distillate inventories along with a huge build in gasoline stocks as implied demand was higher while refinery utilization rates declined strongly on the week to 85.1% of capacity a decrease of 2.6% 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 on the week by 2 million barrels. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 37th week in a row. The year over year deficit narrowed to 29.2 million barrels while the overhang versus the five year average for the same week came in around 15.2 million barrels.
Crude oil inventories decreased versus an expectation for a draw with a major increase in PADD 2. With a decrease in stocks this week the crude oil inventory status versus last year is still showing a wide deficit of around 11.9 million barrels while the surplus versus the five year average for the same week widened to around 7.7 million barrels. PADD 2 stocks increased by 1 million barrels on the week while Cushing stocks were about unchanged. Crude oil inventories in this region of the US have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI spread was trading at significantly lower levels. The spread continues to trade in a trading range of between $9 to $11.50/bbl premium to Brent.
Distillate stocks increased versus an expectation for a modest build. Heating oil/diesel stocks increased by 0.5 million barrels even as exports seemed to increase on the week. The year over year deficit widened to 19.8 million barrels while the five year average deficit narrowed to about 2.6 million barrels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season comes in much colder than any of the expectations the current level of exports will likely continue.
Gasoline inventories increased strongly on the week versus an expectation for a modest build. Total gasoline stocks increased by about 3.8 million barrels on the week versus an expectation for a build of about 1.0 million barrels. The surplus versus last year came in at 4.0 million barrels while the surplus versus the five year average for the same week widened to about 9.9 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 this week.
Although WTI is still trading above the key technical support level of the mid- $94's/bbl the market has completely broken down today. I am not sure whether or not prices are going to hold the $94/bbl level after yesterday's strong sell-off. As such I have downgraded my view and bias to cautiously bearish for the short term.
I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.
Nat Gas futures continue to decline and make year to date lows in the middle of December. That kind of says it all about the state of the Nat Gas market. By this time of the year winter weather is normally engulfing a major portion of the US and heating related Nat Gas consumption is usually running at relatively normal levels. Not so this year as the winter weather has not really arrived in most locations of the US...especially the highly populated parts of the country that consume the majority of Nat Gas in heating their homes and other buildings. The latest NOAA short term weather forecasts (as of late yesterday afternoon) are still simply bearish with only a small portion of the US south expecting below normal temperatures through December 27th...and likely through the end of the year at least.
With the aforementioned forecast there is simply not going to be enough weather related consumption to eat into the growing surplus of Nat Gas in inventory. About half of the so called winter heating season (October through March) is now leaving only a minimal amount of time to catch up in the consumption side of the equation...assuming it actually gets very cold over a large portion of the US and remains cold for an extended period of time. So far heating degrees days for the season to date are running below last year as well as normal.
The current Nat Gas spot futures price level is now trading at a level not seen since around September of 2009. In fact every time I look up at my quote screen as I am writing this newsletter I see lower and lower prices for Nat Gas. Recall that the last time Nat Gas was trading with a $2 handle was back in the period of August/September of 2009...just some food for thought. As I said yesterday about the only positive associated with Nat Gas is the market is very oversold and susceptible to a short covering rally. That said I see nothing at the moment that would translate a short covering rally (if and when it occurs) into a sustainable long term uptrend. At the rate we are falling we may not see Nat Gas trade above $4/mmbtu at all during the winter heating season.
Currently as a new day of trading gets underway in the US markets are higher.
Dominick A. Chirichella
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