As I have been projecting the US Fed FOMC meeting outcome just extended the length of Operation Twist to the end of this year as it downgraded the US economy from its April forecast. This was the easiest action for the Fed and one that is marginally better than doing nothing while the Fed waits for a few more months of economic data before making a decision to enter into a new full blown round of quantitative easing. In their official communiqué as well as in the Bernanke presser the Fed seems to have placed a lot of emphasis on the faltering employment situation and has even projected an 8.2% unemployment rate through the end of the year. As such the next few months of initial jobless claims and nonfarm payroll data are going to likely play a major role in the decision making process of the Fed at the upcoming Jackson Hole meeting in August.
We may be entering a period where bad jobs data could act as buying catalyst for equities and commodities on the premise that bad data increases the likelihood of a new round of QE. For now the markets are not going to get any support from the Fed and the markets showed their disappointment to that outcome almost immediately after the Fed announcement. The markets immediately sold off when the announcement hit the media airwaves only to experience a strong reversal back to upside but then spent the rest of the trading session drifting lower. In fact oil prices (basis WTI) have drifted down to the lower end of the trading range ($80/bbl) and has traded at the lowest level since September of 2011. As the dust settled after the Fed decision traders and investors came back to the simple fact that nothing has changed with Europe still in a financial mess and the global economy continuing to slow even further. Sellers remains in charge.
Now that the Fed event is out of the way the market is quickly refocusing its attention back to Europe and all of its financial issues. Greece has a government (but for how long) and they are forming a negotiating team to try to renegotiate the terms of the bailout program that they have already agreed to a few months back. Problems remain in Spain and possibly Italy while the projections are forecasting the EU economy to slip back into recession (if it is not already there) for the rest of this year...at least. In yet another attempt to address the evolving sovereign debt issues the EU Finance Ministers meet today ahead of next week's EU Ministers Summit on June 28 -29.
For the next week or so there will be many 30 second news snippets discussing what the EU might or might not due. Most will be rumors and will serve to add another layer of volatility to the market. I am not sure at this time as to whether or not a new and unique solution to the problems that have plagued the EU for the last three years or so will emerge. All eyes will be on Germany and Angela Merkel for any snippets ahead of the meetings that might signal the direction of the EU.
Global equity markets gave back some of their gains from earlier in the week as shown it the EMI Global Equity Index table below. The Index lost about 0.3% over the last twenty four hours narrowing the year to date gain to 2%. Japan was the only bourse over the last twenty four hours to log a gain. The Index is still trading above its lows hit during the first week of June but is still well off of its highs hit back in the middle of March. Global equity markets are reflective of a slowing global economy and have been a negative for the rest of the risk asset markets including the oil complex since the downward correction started in mid-March.
Oil has traded down to the lower end of the trading range basis WTI and has blown through the Brent trading range with the spot Brent contract now trading at the lowest level since December of 2010 and seems to be setting up in a new trading range that could take it down to the $85/bbl level on the low end and $95/bbl on the high end for the short to medium term. Brent has joined WTI and has moved into a widening contango raising the prospects that the floating storage trade that dominated the markets in 2009 may be working its way back to a new round of storage trades as the global oil markets remains well balanced with no signs of shortfalls any place in the global system. Yesterday's EIA report reaffirmed that view as stocks built across the board.
Wednesday's EIA inventory report was bearish as it showed a large increase in total stocks, a surprise build in crude oil, a modest build in gasoline as well as in distillate fuel stocks. Total implied demand decreased strongly with gasoline demand leading the way lower. Refinery utilization rates decreased slightly on the week to 91.9% of capacity a decrease of 0.1% in refinery run rates. 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 surged by 11.1 million barrels after increasing modestly the week before. The year over year surplus widened to 34.1 million barrels while the surplus versus the five year average for the same week widened to 47.5 million barrels. By all measurements total oil supply in the US is well balanced to comfortable irrespective of the evolving geopolitical risk at the moment.
Crude oil inventories increased (by 2.9 million barrels) versus an expectation for a modest draw. 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 an increase in stocks this week the crude oil inventory status versus last year is now showing a surplus of around 23.5 million barrels while the surplus versus the five year average for the same week came in around 40.5 million barrels. PADD 2 crude oil inventories increased by about 1.9 million barrels while Cushing, Ok crude oil inventories increased by 0.4 million barrels on the week.
Crude oil inventories in the mid-west region of the US are still hovering near record high levels even as the Seaway pipeline is now pumping oil out of the region as well as an increase in refinery run rates. The increase in crude oil inventories from the region this week is bullish for the Brent/WTI spread. The spread has been narrowing the last week on a combination of the start of Seaway, a faltering European economy and an easing of the geopolitical risk but has turned over the last twenty four hours.
Distillate stocks increased versus an expectation for a modest seasonal build. Heating oil/diesel stocks increased by 1.2 million barrels. The year over year deficit came in around 20.8 million barrels while the five year average remained in a deficit of about 17.5 million barrels.
Gasoline inventories increased versus an expectation for a modest build in stocks as the summer gasoline driving season gets underway. Total gasoline stocks increased by about 0.9 million barrels on the week versus an expectation for a modest build. The deficit versus last year came in at 11.9 million barrels while the deficit versus the five year average for the same week was about 7.9 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 bearish categorization on the week as both gasoline and distillate fuel increased on the week along with crude oil stocks.
I am still maintaining my oil view at neutral. I am still expecting the oil complex to remain the $80 to $90/bbl trading range basis WTI and $85 to $95/bbl basis Brent barring any surprises from the remaining June events. The outcome of all of the upcoming events I have been discussing in the newsletter over the last several weeks have been mostly bearish for oil prices.
I am keeping my view at neutral to see if Nat Gas is able to hold onto the developing trading range. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
This week the EIA will release the weekly Nat Gas inventory report on its regularly scheduled day and time...Thursday, June 21th. This week I am projecting the fourteenth net injection into inventory of 60 BCF. My projection for this week is shown in the following table and is based on a week that experienced some cooling related demand. My injection forecast is based on the fact that some parts of the US experienced above average temperatures. My projection compares to last year's net injection level of 90 BCF and the normal five year average net injection for the same week of 88 BCF. Bottom line the inventory surplus will narrow again this week versus last year and the five year average if the actual data is in sync with my projections but not nearly as much as we have seen over the last several months. In fact some of the projections are calling for an injection above last year.
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 678 BCF. The surplus versus the five year average for the same week will narrow to around 638 BCF. This will be a neutral to slightly bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections and consensus are forming in the range of about 45 to 75 BCF with most expecting an injection of about 64 BCF.
Currently markets are lower as shown in the following table.
Dominick A. Chirichella
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