Oil recovered most of it losses for the week and ended Thursday's session down only about $0.60/bbl for the week to date. The main driver in the oil complex is not really crude oil... it's mostly RBOB gasoline which has increased by almost $0.23/gallon or almost 8% in just the last three trading sessions. The plethora of refinery issues including the restart problems from Hurricane Isaac have all contributed to gasoline inventories continuing to decline and now standing at the lowest level for this time of the year since October of 2008. The situation is even more interesting in that inventory levels in the Northeast are the lowest level for this time of the year on record. The spot October RBOB contract is heading for expiration on Friday and it looks like it is going to end its tenure on the board in an atypical finish with a bang and not the typical quiet exit for a non-driving season month. In fact the industry is already in the beginning of the so called heating season and yet RBOB is drawing most of the focus among refined product traders.

Interestingly since the EIA inventory report from September 19th showed a huge build in crude oil inventories the fundamentals have been impacting the price of oil form a bearish perspective. Now with both gasoline and distillate fuel inventories continuing to decline the market sentiment toward the current oil fundamentals are starting to shift toward a more bullish bias with refined products leading the way higher. Certainly a positive for the refiners as crack spreads for both gasoline and distillate fuel are soaring higher. At the moment the fundamentals are switching to the tailwind side of the price equation for the oil complex joining the evolving geopolitical situation in the middle east along with the growing inflation risk from the wide assortment of stimulus programs around the world.

From a technical perspective the market has been in the process of forming the boundaries of a trading range as it entered a consolidation pattern after declining about 10%. The lower boundary is now looking like it may hold around the $90/bbl level for the spot WTI contract and about $110/bbl for the November Brent contract. The next leg may now be to the upside to retest the upper end of the trading range. On the refined product front RBOB gasoline has reentered the longer term upward trading channel while the spot HO contract is heading in that direction but still has some ground to make-up. From a technical viewpoint the oil complex looks like it may be starting to put in a short term bottom.

On the economic front there is a tad more optimism coming from Europe after Spain released its budget which shows that they are focused on austerity to cut their huge budget deficit and debt load. The market viewed the action by Spain as a positive and one that could result in the bailout if and when Spain asks for or needs one. Many view the budget put together by Spain as a prelude for Spain finally requesting a bailout. France is expected to release its budget in which they are targeting to reduce their deficit to 3% of GDP in 2013 from 4.5% in 2012. Tax increases are a large part of the path to deficit reductions in France. After about a week or so of a growing negative sentiment in Europe the market is starting to ease its concerns about Europe with the euro higher for the second day in a row. I am still of the view that the EU will get a handle on its sovereign debt issues but will likely take a lot longer to solve the slowing of the EU economy.

In Asia traders and investors are still looking for a sign that the Chinese government will get more aggressive in trying to arrest the slowing of the main economic growth engine of the world... China. For the last month or so the markets have been disappointed as not much... if any action has taken place. Traders and investors in Chinese equities punished that market pushing values down to the lowest level of the year and into a technically defined bear market as the Chinese bourse is down more than 20% for the last 12 months. China will be on holiday for a week beginning on October 1 for the Golden week holiday. There is always the possibility of a government announcement when the markets are closed in China.

The EMI Global Equity Index was about unchanged over the last twenty four hours as shown in the following table. The equity markets are also starting to show some signs of possibly forming a short term technical bottom as the sentiment toward Europe could to shifting to a more positive viewpoint while optimism still abounds from those that are expecting a more aggressive monetary policy going forward in China. That all said the EMI Index is lower by 1.2% heading into the last day for trading for the week in the US. The Index is still showing a gain of 7.8% for the year with Germany solidly holding the top spot in the Index with China at the bottom. Three bourses continue to show double digit gains for the year ...Germany, Hong Kong and the US.

Oil has become more reasonably valued after about a 10% downside correction (basis WTI). WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. Both crude oils have bounced off of the lower end of the trading range as support has emerged from the refined products markets as well as from what seems to be a shifting sentiment in Europe. The headwinds are once again starting to slowly lose out to the tailwinds which for the moment now also include the current fundamentals related to the refined products sector.

I am keeping my view at neutral with a bias to the upside as the industry is back to normal operations after Isaac but the market is trading based on a perception of what the upcoming winter may do to Nat Gas related demand. At current prices the economics now favor coal over Nat Gas and there are no major weather pulls on demand.

Markets are mostly higher ahead of the US trading session as shown in the following table.

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


View All Market Commentary

*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.

Copyright CME Group All rights reserved.