Most of the commodities in the oil complex are starting the week with a small gain (so far) as market participants are looking at more positive economic signs coming from the developed world economies. Japan Q2 GDP expanded by 2.6 percent an improvement but still below the market consensus. The US economy is growing slowly but at a steady pace and many are expecting data this week to show that the EU recession may finally be over. An article in the Wall Street Journal this morning highlights that for the first time since the start of the global financial crisis the advanced global economies… including Japan are contributing more to growth than the emerging market countries.

This is an interesting turn as the developing world economies actually led the global economy out of the recession. From an oil perspective I view this transition as suggesting that if the more mature oil consuming nations are taking the lead from an economic growth perspective it may mean that oil consumption may grow at a slower pace than during periods of time when the emerging market countries are leading the global economy higher. With non-OPEC supply expected to continue to be robust and if global demand growth slows oil prices should eventually settle into a lower more stabilized trading range.

Over the last week risk asset markets in the EMI Weekly Price Board were mixed but mostly lower. Last week global risk asset markets continued to lose their upside momentum as some markets were hit with modest rounds of profit taking selling. Oil prices were lower across the board for the second week in a row with refined products markets leading the way down. The externals were a neutral to negative price driver for the complex with the prospects for a weaker fundamental picture adding to the negativity from the externals last week.


Last week the oil complex was negatively impacted by the prospects that oil demand growth may still be continuing to slow. The oil complex ended with both WTI and Brent decreasing but with WTI losing a bit more than Brent as the September Brent/WTI spread widened slightly resulting from another round of short covering in the spread. Refined products markets were lower on the week with RBOB gasoline falling more than HO resulting in a negative week for all of the crack spreads including the widely followed 3-2-1 crack spread combination.

The September WTI contract decreased by 0.91 percent last week as total US crude oil & refined product stocks increased modestly. WTI decreased more than the Brent contract resulting in a small widening of the September Brent/WTI spread on the week. The spot WTI contract decreased by $0.97/bbl while Brent decreased by 0.67 percent or $0.73/bbl. Crude oil stocks in Cushing declined strongly as refinery runs in PADD 2 increased.

The September Brent/WTI spread widened by $0.24/bbl this week. Since early February of this year the Brent/WTI spread is lower by over $20/bbl or a decline of over 85 percent. The Brent/WTI spread remains in a longer term narrowing trend with bouts of short covering still expected from time to time as we saw last week.

Cushing inventories are now at the lowest level since March of 2012. With more outlets to move oil out of Cushing working their way to completion along with the existing logistics inventories in Cushing are more likely to remain in a destocking mode over the medium term which will be bearish for the spread.

On the distillate fuel front the Nymex HO contract decreased by 2.54 percent or $0.0779/gal on the week as distillate fuel inventories increased for the week. Gasoline prices decreased after another small build in inventories last week. The September Nymex gasoline price decreased by 2.89 percent or $0.0865/gal this past week.

The September Nat Gas futures contract decreased modestly on the week. The Sep contract decreased by 3.5 percent or $0.117/mmbtu and remains below the $3.41/mmbtu technical resistance level. The spot or September futures contract is now trading in the range with $3.20/mmbtu on the support side and $3.41/mmbtu now the new resistance level.

The spot Nat Gas futures contract ended last week trading either side of unchanged throughout Friday's session. So far the market is holding onto the gains from yesterday's post inventory report short covering rally. The spot contract remains within the boundaries of the $3.20/mmbtu to $3.41/mmbtu trading range that has now been in play for last seven trading sessions.

Shortly after the weekly inventory report was released the market sold off strongly, breached the range resistance and almost traded down to the next technical support level. Almost as quickly… the market rebounded and reversed quickly to the upside. It was technical reversal day with the market making a new low only to close very close to the highs of the day. Thursday's trading action was technical supportive and likely the reason why the market has been able to add to yesterday's gains (so far).

From a fundamental perspective the market remains biased to the bearish side as the latest NOAA six to ten day and eight to fourteen day forecasts are still calling for a large portion of the US to experience below normal temperatures through the third week of August. Going forward the weekly inventory injections are very likely to outperform both last year and the five year average. The current inventory level is now above the so called normal or five year average with the surplus likely to grow over the next several weeks at least. In addition the deficit in inventory compared to last year is expected to narrow as long as the weather remains biased to the bearish side.

On the financial front equity markets around the world were mostly lower with the US market also lower on the week with the broader EMI Global Equity Index decreasing by 0.20 percent. The year to date loss for the EMI Index is now at 3 percent. Global equity markets were a negative price driver for the oil complex for all of last week.

The euro and the Yen were higher on the week while the US Dollar Index decreased modestly. Last week the US dollar was a positive price driver for oil and most commodity markets.

I am maintaining my oil view at neutral and maintaining my bias at cautiously bearish for the short term as the downside correction seems to be gaining momentum once again. The strong destocking pattern of crude oil in the US Midwest is not acting as a major supporting catalyst at the moment.

I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture has shifted as the temperatures across the US do not appear to be moving back to warmer than normal weather anytime soon.

Markets are mixed heading into the US trading session as shown in the following table.

Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.

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