As discussed in the newsletter two weeks ago I suggested that the oil complex was in the early stages of forming a technical bottom pattern. I also said this was the second try at forming a bottom in the month of April with the first attempt in the beginning of the month. The first try failed but so far the second attempt has been successful pushing all of the commodities in the complex into a new higher trading range or the range that was in play during the first half of April. At the moment the complex is still in a recovery trend that has been driven more by short covering rather than by a surge of new longs moving back into the market. From a technical perspective the market is still trading in the higher trading range but it is starting to look like the upside momentum may be starting to lessen over the last two trading sessions.
The main negative driver for the oil complex has been the disappointing macroeconomic data that has hit the media airwaves during the month of April. The vast majority of the economic data continues to suggest that global economic growth is slowing and thus global oil demand growth is also likely to slow in sync with the slowing economy… especially in the emerging market area with China in the lead. The most recent data point was released on Friday when the US Commerce Department reported that US GDP increased to 2.5 percent but less than the market was expecting for the first quarter. The market was expecting GDP at 3 to 3.2 percent for Q1. In addition US consumer sentiment declined to the lowest level in three months with the final reading for April coming in at 76.4 compared to March at 78.6. The data out of Europe last week was even more negative than the US data suggesting that the entire EU is falling deeper into contraction with Germany now on the cusp of dipping back into recession for the second time in five years.
This week the economic calendar is full with market moving economic data hitting the airwaves almost every day. Some of the main data points include China's PMI data, the minutes from the last US FOMC meeting, Thursday's ECB announcement and press conference with the ever important US nonfarm payroll report on Friday. In addition there will be reports on personal spending, PMI data from the US and other major countries around the world and consumer spending along with auto and truck sales. All of the major data points that will be issued this week are likely to be scrutinized very carefully for any and all signals as to the state of the global economy and the implication it may have on oil consumption going forward.
The oil complex ended modestly higher across the board last week with the Brent/WTI spread narrowing strongly compared to the end of the previous week and thus narrowing by 11.42 percent or $1.30/bbl. Crude oil led the refined products markets higher on the week resulting in all of the crack spread combinations also narrowing on the week.
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The spot WTI contract led the entire complex higher even as US crude oil inventories increased along with crude stocks in PADD 2 and Cushing suggesting that a major portion of the gains in WTI last week were likely the result of short covering rather than the due to a structural change it the supply and demand balances. WTI increased more strongly than Brent resulting in another weekly narrowing of the June Brent/WTI spread on the week. The spot WTI contract increased by 5.45 percent or $4.81/bbl while Brent gained about 3.52 percent or $3.51/bbl. Crude oil stocks in PADD 2 increased while Cushing stocks built marginally as refinery runs in PADD 2 increased by 0.2 percent suggesting that spring maintenance season may be starting to turn the corner.
The June Brent/WTI spread has narrowed for the last ten out of eleven weeks. The June spread narrowed by 11.42 percent or $1.30/bbl. Over the last eleven weeks the June spread has declined by $9/bbl or 48.1 percent (compared to where the spread is trading as of this writing). The June spread is once again trading in single digits for the second time in the last two trading sessions. If there is a close or two below the new resistance level of $10/$10.50/bbl the spread will likely make a pass at testing the next major support level of around $8.25/bbl hit back in mid-December of 2012 basis the spot continuation chart.
I have been indicating that the spread will continue to narrow for the last several months in the newsletter and have been expecting the spread to trade in single digits. I did not expect the spread to move into single digits until the second half of the year but with North Sea production at robust levels and European crude oil demand remaining weak the narrowing momentum is getting a push from the Brent side and not only from the fact that more crude oil is moving out of the mid-west.
On the distillate fuel front the Nymex June HO contract increased by 3.26 percent or $0.0904/gal on the week as distillate fuel inventories only increased marginally on the week on temperatures that were beginning to be spring like over parts of the US during the report period. Gasoline prices increased after a surprise decline in inventories last week. The June Nymex gasoline price increased by 2.39 percent or $0.0659/gal this past week.
The June Nat Gas futures contract decreased modestly by 4.82 percent or $0.214/mmbtu on the week after failing to breach and stay above the technical and psychological $4.40/mmbtu level. Last week's Nat Gas inventory report was within the expectations and just slightly below the market consensus. The spot June Nymex futures contract put in a volatile and wide intraday trading range session since the release of the inventory report. In the end it has held above the technical support level of $4.16/mmbtu… at least heading into this week's US trading session.
The June contract pretty much followed the wide intraday trading pattern of the expiring spot May contract as market participants focus on the fact that the industry is now clearly in the lower demand shoulder session and will likely remain in this pattern for the next month or so.
The latest NOAA six to ten day and eight to fourteen day forecasts are still suggestive of a period of not cold enough to generate any significant Nat Gas heating related demand nor hot enough to expect an early start to the summer cooling season. As such the market is entering a period of low seasonal demand which is likely to weigh on prices over the coming weeks as inventory injections should increase over current levels and return to more normal historical levels for this time of the year.
On the financial front equity markets around the world were mostly higher on the week. The EMI Global Equity Index is still showing a loss for the year of 0.5 percent after increasing by 1.73 percent last week. Global equity markets were a positive price driver for the oil complex last week.
The euro and the US dollar Index were lower while the Yen was higher for the week. Last week the global equity markets and the US dollar were positive price drivers for oil and most commodity markets. I am maintaining my view of the entire complex at neutral with a cautiously bullish bias as the short term price recovery in oil over the last week or so could extend further. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range resistance levels suggesting further upside potential in the short term.
I am maintaining my view at neutral for Nat Gas and maintaining my bias back at neutral even though the spot Nymex contract is continuing to trade above the $4.16/mmbtu level. The market failed for the third day in a row to breach the $4.40/mmbtu resistance and then turned to the downside since failing. That is a bearish signal and one that suggests that the market may now test the lower $4.16/mmbtu support level.
Markets are mixed ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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