A mixed performance in the oil complex to start the week with Brent, Gasoil and HO all adding value while WTI and RBOB declined on the day. Mixed economic data along with a mid-west to US Gulf Coast pipeline flow interruption were the main price drivers in a light activity session as Europe was still closed on Monday. Cyprus is still evolving while the latest PMI data out of the US disappointed and China's factory activity… although still growing… also disappointed compared to the market expectations. There is a full schedule of macroeconomic data this week culminating in the ever important US nonfarm payroll report on Friday.
The market is expecting another strong jobs report with new job gains of close to 200,000 with the headline unemployment number holding steady at 7.7 percent. The employment situation is an integral part of the US Central Bank's monetary policy decisions. The Fed has consistently indicated that they would continue with their massive quantitative easing program as long as the unemployment number remains above 6.5 percent.
Today the European unemployment rate reminded all that it does not look like the EU economy is going to break out of its current recession anytime soon. The EU unemployment rate for the 17 nation group came in at 12 percent in February with the January figure revised up to 11.9 percent. This is the highest level of unemployment since the data series began to be published back in 1995. The EU economy has been in a contracting mode or recession since last year with most projecting that the recession will last at least through the first half of 2013 and likely beyond that timeframe. The evolving situation in Cyprus, the lack of a new government in Italy and a growing problem with Slovenia's debt are certainly not helping to move the EU economy out of its current malaise.
Global equity markets lost value over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index is lower by 0.4 percent for the week with the year to data loss of 2013 widening to 0.5 percent. Three of the ten bourses in the Index remain in negative territory for the year with Brazil still showing the largest loss. Japan is still on top of the leader board with a double digit gain of 15.2%. However, the gain in the Japanese bourse is well off its highs of over 20% gains for the year. The US Dow is the only other bourse in the Index showing a double digit gain for the year. Yesterday the global equity market were a negative price driver for the oil complex as well as the broader commodity complex.
The main news on the fundamental side of the oil complex was the shut-down of Exxon's Pegasus pipeline after a leak was discovered on Friday afternoon in Arkansas. The pipeline has a capacity of about 99,000 bpd and runs from Patoka, Illinois to Nederland, Texas. So far there is no word from Exxon as to when repairs will be completed and the line will resume full operation. The line was shipping Canadian Wabasca heavy crude oil at the time of the leak. Oil will now back up in Patoka storage and likely result in the diversion of crude that normally heads to Patoka from Canadian being diverted to Cushing… thus potentially resulting in Cushing inventories starting to build or at least minimizing the destocking pattern out of Cushing that has been in play over the last several months.
The shutdown of this line has already caused the May Brent/WTI spread to continue in a short covering rally that actually began late last week after the EIA reported a build in Cushing inventories for the week. An extended shut in of the pipeline will result in a temporary realignment of the Brent/WTI spread as well as some of the physical oil spreads in the Gulf coast. At the moment the May Brent/WTI spread has not bottomed and held support around the $13/bbl level (last week) with the spread widening and closing above the $14/bbl resistance after the announcement of the pipeline shut-down. The next level of technical resistance for the spread is around the $15.40/bbl level with support at $14/bbl.
I was expecting a more shallow and shorter timeframe short covering rally in the spread but the pipeline shut down has changed the game in the short term or at least until repairs are made and the pipeline returns to normal operational levels. On the other side of the spread equation the North Sea production levels are running at normal historically high levels or even above as the faltering EU economy is suppressing crude oil demand for North Sea oil. The Brent side of the spread is weak and could limit how much the spread actually widens as a result of the pipeline shut down. For now the new trend is long the spread within the aforementioned support and resistance parameters.
This week's round of oil inventory reports will follow its normal schedule with the API data being released on Tuesday afternoon followed by the EIA report hitting the media airwaves at 10:30 am on Wednesday. My projections for this week's inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was winter like over the east coast... and a small draw in gasoline stocks during the report period as refinery runs remain at below normal levels during the maintenance season.
I am expecting crude oil stocks to increase by about 2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 22.7 million barrels while the overhang versus the five year average for the same week will come in around 36.7 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok and in PADD 2 as the Seaway pipeline has been has been running at constrained levels for most of the report period. The impact of the Pegasus pipeline shut down will not impact this week's report as the line was shut on Friday afternoon or after the EIA inventory snapshot. It will impact next week's report and likely result in another build in crude oil in the region. This will be bullish for the Brent/WTI spread and will serve as a catalyst to keep the short covering rally going.
With refinery runs expected to increase by 0.2 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year returning to a surplus of around 3.1 million barrels while the surplus versus the five year average for the same week will widen to around 1.6 million barrels.
Distillate fuel is projected to decrease by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 17.6 million barrels below last year while the deficit versus the five year average will come in around 21.3 million barrels.
The following table compares my projections for this week's report (for the categories I am making projections with the change in inventories for the same period last year. As you can see from the table last year's inventories are in directional sync but with some large differences compared to last year's changes. As such if the actual data is in line with the projections there will be large changes in the year over year inventory comparisons for most everything in the complex.
I am maintaining my view of the entire complex at neutral but with a cautiously bullish bias as the oil complex appears to have formed a short term technical bottom. HO and RBOB have been trending higher but within the confines of a trading range. They are both currently trading near the upper end of their respective trading ranges. WTI has now breached its range resistance level with Brent hovering very near its range breakout level. The complex is showing signs that the next move could be a move to the upside.
I am maintaining my view at neutral for Nat Gas as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. I do not expect prices to collapse but I view the moderating temperatures to result in the Nat Gas price rally likely topping out at this time as the lower demand shoulder season finally arrives. Markets are mixed ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
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