As has been the case for the last month or so the 30 second news snippets about the US fiscal cliff negotiations continue to move the price of oil and most risk asset markets. Yesterday the market became more skeptical that a deal will be done after the President said he would veto the House's Plan B while the House leader said take it or leave it. Talks between both side have deteriorated over the last day or so almost guaranteeing that a deal may not get done until the last minute. I still expect a deal to be done.
The House will vote on Plan B today which includes a tax increase on those making $1 million dollars or more per year. It is likely to pass the Republican controlled House. It is not going to be embraced by the Senate nor the President but I believe Speaker Boehner's objective is to use it as part of negotiations in one last ditch effort by the Republican side to get closer to a deal that they can accept. Oil and most risk asset markets started drifting lower yesterday afternoon and have remained soft overnight and heading into the US trading session. The market is once again looking for a new sign that a deal is getting closer.
On the macroeconomic front the market will get the weekly US jobless claims and the third reading of the third quarter GDP. Overall the macroeconomic data has been suggesting that the US economy is starting to stabilize and possibly be in the early stages of a slow growth pattern. That said in the short term the main market mover will be the fiscal cliff negotiations with just about everything else acting as secondary price drivers.
Global equities have still been able to add value over the last twenty four hours in spite of no progress on the fiscal cliff deal as shown in the EMI Global Equity Index table below. Most bourses in the Index gained ground over the last twenty four hours resulting in the weekly gain widening to 1.7% while the year to date gain increased to 11.4% or at about the same level the Index was at the end of March of this year. Five of the ten bourses in the Index are showing double digit gains for 2012 with the Chinese bourse inching closer to positive territory with its year to date loss now at just 1.4%. Global equities have been mostly a positive price driver for the oil complex as well as the broader commodity complex. That said the uptrend in global equities seen over the last month or so is fragile and can easily become derailed if a fiscal cliff deal is not reached before the end of the year.
Yesterday's EIA inventory report was mostly bullish as total commercial stocks decreased modestly on the week. Overall I would categorize the report as biased to the bullish side as total commercial stocks decreased modestly along with an decrease in crude oil inventories as crude oil imports also decreased on the week. In addition refinery utilization rates increased strongly by 1.1% on the week to 91.5% 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 decreased by 1.9 million barrels. The year over year surplus came in at 40.5 million barrels while the surplus versus the five year average for the same week widened to 52.1 million barrels.
Crude oil inventories decreased (by 1.0 million barrels) and within 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 37.5 million barrels while the surplus versus the five year average for the same week came in around 45.5 million barrels. Crude oil imports decreased modestly on the week.
PADD 2 crude oil inventories surged by about 1.7 million barrels while Cushing, Ok crude oil inventories also increased by about 0.1 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 Feb spread is trading around the $20/bbl level as of this writing and within about $2/bbl of the contract high for the spread made in the third week in November.
Distillate stocks decreased versus an expectation for a modest build even as refinery run rates increased by 1.1%. Heating oil/diesel stocks decreased by 1.1 million barrels on a week that experienced modestly warmer than normal temperatures along the highly populated north east. The year over year deficit came in around 24.5 million barrels while the five year average remained in a deficit of about 29 million barrels. Exports of distillate fuel remain robust at a tad over 1 million barrels per day which accounts for this commodity still running at lower than normal levels of inventory for this time of the year and ahead of the heart of the winter heating season.
Gasoline inventories continue to grow increasing more than the expectations for a much smaller build. Total gasoline stocks increased by about 2.2 million barrels on the week versus an expectation for a smaller build. The deficit versus last year switched to a surplus of 0.5 million barrels while the surplus versus the five year average for the same week held steady at about 7.3 million barrels. Gasoline inventories have built by about 19 million barrels over the last five weeks as refinery runs are rising and demand is at its normal seasonal low for gasoline.
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 bullish categorization on the week for everything in the complex except gasoline. Overall this week's report was biased to the bullish side as total stocks are once again back to decreasing.
I am maintaining my view at neutral and my bias at cautiously bullish as the current fundamentals are still biased to the bearish but the forward view of 2013 fundamentals are starting to look more supportive. In addition the technicals are indicating that the selling momentum has eased as the market is has now moved into a higher level trading range 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. But as discussed above the market seems to be paying less attention to the nearby fundamentals. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas view at neutral and bias at cautiously bearish side 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 remain in the new lower trading range... as the latest temperature forecast is once again less supportive. 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 back to switching to a more neutral to bearish scenario.
This week the EIA will release its inventory report on its normal schedule... on Decembers 20th at 10:30 AM. This week I am projecting a modest withdrawal of 68 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 100 BCF and the normal five year net withdrawal for the same week of 144 BCF. Bottom line the inventory surplus will widen significantly again 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 strongly 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 80 BCF. The surplus versus the five year average for the same week will also widen to around 358 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 50 BCF to about a 90 BCF net withdrawal with the consensus around 72 BCF according to the latest Reuters poll.
Markets are mostly lower heading into the US trading session as shown in the following table.
Note: Friday will be the last publication of the Energy Market Analysis for 2012. Publishing will resume on Wednesday January 2, 2013.
I do want to take this opportunity to thank all of you for reading the newsletter . I hope you enjoyed reading the daily report as much as I have enjoyed writing it. 2012 was yet another tumultuous year but one that was laden with many opportunities in the energy world. 2013 is likely to be even more interesting. I look forward to conversing with you all in 2013.
I also wish all of you a very happy holiday season and an extremely healthy and happy 2013.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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