Oil prices are stabilizing after declining on a mostly bearish oil inventory report on Wednesday (see below for more details on the report). Although crude oil stocks declined both gasoline and distillate inventories soared as refinery runs surged. As has been the case for most of this year there is an ample supply of oil in the US and around the world. There is no shortage of oil anyplace in the world. The overall fundamentals remain biased to the bearish side.

This will provide a challenge when OPEC meets next week to discuss their forward quota strategy. With the continued E&P success in non-OPEC countries coupled with global oil demand growing at a very slow pace OPEC will be faced with the prospects of potentially having a negative impact on prices if they continue to produce at the current levels. They will have to make a cut either now or during the first half of next year unless the global economy turns around and oil demand goes through a growth spurt. The outcome of this meeting will be widely watched by the industry. The meeting is next Wednesday (Oct 12thth) in Vienna.

As has been the case for several weeks the short term movement in financials and commodities has been driven by the 30 second news snippets hitting the media airwaves over the state of the negotiations for a budget deal in the US to avoid the so called fiscal cliff. Based on the movement of some of the Republicans toward agreeing to raise taxes on the wealthy the prospects for a deal are starting to improve. As I have been indicating there will be a deal as soon as both side are done posturing and convinced that they got as much as they could for their side out of the negotiations. Once a deal is reached all of the markets will shift their focus back to the primary price drivers with the state of the global economy at the top of the list.

Positive economic data out of Germany this morning (manufacturing orders rising) is offsetting some of the negativity that the EU is still solidly in an official recession. Tomorrow the ever important US nonfarm payroll data will be released. Yesterday the ADP private sector payroll number came in as expected around 118,000 new jobs. Tomorrow the market is looking for the US nonfarm data to show an increase of 90,000 new jobs with the unemployment rate coming in at 8%. I am not certain this report is going to be much of a market mover in either direction as many market participants may discount the results as the numbers were likely impacted by Hurricane Sandy.

The global markets are slowly starting to trade like a US budget deal is near. The EMI Global Equity Index has gained 0.6% for the week resulting in the year to date gain widening to 7.4%. There are still four of the ten bourses showing double digit gains for the year with Germany and Hong Kong holding the number 1 and 2 spots. China remains the only bourse still showing a year to date loss at 7.8%. Global equity markets have been mostly a positive for oil prices and the boarder commodity complex this week.

Yesterday's EIA inventory report was mixed but biased to the bearish side as total commercial stocks increased on the week. Overall I would categorize the report as biased to the bearish side as total commercial stocks increased modestly even with a decline in crude oil inventories with crude oil imports increasing on the week. Refinery utilization rates increased strongly by 2% on the week to 90.6% 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 increased by 5.9 million barrels. The year over year surplus came in at 38.6 million barrels while the surplus versus the five year average for the same week narrowed to 40.4 million barrels.

Crude oil inventories decreased (by 2.4 million barrels) and above the market expectations. However, 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 35.7 million barrels while the surplus versus the five year average for the same week came in around 41 million barrels. Crude oil imports increased modestly on the week.

PADD 2 crude oil inventories decreased by about 0.4 million barrels while Cushing, Ok crude oil inventories decreased by about 0.2 million barrels on the week. Crude oil inventories in the mid-west region of the US are off of their record high levels as the Seaway pipeline is now pumping oil out of the region as well as refineries returning to more normal operating levels. The decrease in crude oil inventories in PADD 2 and in Cushing is neutral to bearish for the Brent/WTI spread. The Jan spread is trading around the $21/bbl level as of this writing and off of the highs made about a week ago.

Distillate stocks increased above the range of expectations as refinery run rates increased by 2%. Heating oil/diesel stocks increased by 3 million barrels on a week that experienced mostly colder than normal temperatures along the highly populated north east. The year over year deficit came in around 26 million barrels while the five year average remained in a deficit of about 31.2 million barrels.

Gasoline inventories surges well more than the expectations for a much smaller build. Total gasoline stocks increased by about 7.9 million barrels on the week versus an expectation for a smaller build. The deficit versus last year came in at 2.9 million barrels while the surplus versus the five year average for the same week was about 2.4 million barrels.

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 mixed categorization on the week as gasoline and distillate fuel were clearly bearish while crude oil and jet were all bullish. Overall this week's report was biased to the bearish side as total stocks are once again back to increasing.

I am keeping my view at neutral and maintaining my bias toward the cautiously bullish side as the oil markets may get a boost from what seems to be a slightly changing sentiment coming from the financial markets. At the moment 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 remains in the price in anticipation of a spreading of the civil war in Syria as well as the ongoing concerns over Iran's nuclear program. In the short term the price of oil will move based more on the markets view of the global economy, the US fiscal cliff negotiations and less so on the geopolitics. This is still an event driven market for oil at the moment.

I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are once again suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... especially after last week's bearish inventory snapshot. 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 early stages of the winter heating season and currently those forecast are all mostly bearish.

This week the EIA will release its inventory report on its normal schedule... on Decembers 6th at 10:30 AM. This week I am projecting a net withdrawal of 55 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 14 BCF and the normal five year net withdrawal for the same week of 51 BCF. Bottom line the inventory surplus will narrow modestly 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 modestly 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 move into a deficit of about 15 BCF. The surplus versus the five year average for the same week will narrow to around 186 BCF. This will be a neutral to bullish 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 forming in the mid 60's.

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

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.