Oil prices are continuing to rise in overnight trading on a combination of an elevation of the geopolitical risk associated with Syria, Iran and Israel along with a modestly bullish weekly inventory report. In addition the possibility of another round of quantitative easing is also providing support to oil and the broader risk asset market complex. The early round of corporate earnings have been relatively stronger than expected which is also providing support for the equity complex. Trading this week has been impacted by a bit of everything with most of the price drivers biased to the upside.
On the geopolitical front the situation in Syria elevated yesterday as the civil war ratcheted up a notch on news that the opposition group was able to penetrate the guarded quarters of the defense building with a suicide bomber detonating an explosion that resulted in the killing of Assad's brother in law and Defense Minister who is an integral member of the inner circle. All of the experts are now projecting that the Assad regime could fall within days. The biggest concern is if Assad will use his chemical weapons stockpile to wreck havoc on the country along with a concern as to what happens when Assad is actually overthrown. Syria is not a major oil producer but the evolving situation in this country raises the geopolitical risk in the whole region and as such it is one of the catalyst that has been pushing oil prices higher.
In addition to the change of events in Syria a bus carrying Israeli tourists was blown up in Burga yesterday killing several and injuring many others. The Israeli's are blaming the Iranians for this act of terrorism and once again raising the geopolitical risk that some form of military retaliation is likely to occur sooner than later. It also reduces the likelihood that anything positive will come from the Iranian/West meeting scheduled for July 24th in Istanbul.
The market is back to being driven by the possibility of a supply interruption in the middle east region of the world. Whether or not any of the events that have occurred over the last twenty four hours will eventually change the supply dynamics of the region is certainly an unknown. One can not underestimate what the Israeli's will do in retaliation for an act of terrorism especially if they have concrete evidence that it was an act by the Iranian. Also one can not underestimate what Assad might do with his stockpile of chemical weapons as he is quickly becoming more isolated and cornered with his regime on the verge of collapse. At a minimum the evolving situation in the Middle east will keep oil bid with limited downside at the moment.
Other risk asset markets...in particular equities got another boost yesterday from the comments by Mr. Bernanke who said before Congress that the Fed does not see a double dip recession looming in the US and the Fed stands ready to take whatever action it needs to take if warranted by a continuation of the slowing of the US economy. This was enough to bring out the easing crowd coupled with some positive corporate earnings from the tech sector to send equity prices rising for the second day in a row. The market has continued to slowly build another round of quantitative easing into the price of equities and some traditional commodities. Along with the evolving geopolitics the prospects for more easing from the US and China will also keep the markets bid and thus minimizing the downside risk at the moment.
Global equity markets rose across the spectrum yesterday as shown in the EMI Global Equity Index table below. The Index is now higher by 1.1% on the week sending the Index back into to positive territory for the year by 0.6%. Seven of the ten bourses in the Index are in positive territory for 2012 with Germany soaring higher on a weak euro environment that is a big positive for this export oriented economy. Over the last few days the global equity markets have been a positive price driver for oil and the broader commodity complex.
Wednesday's EIA inventory report was mildly bullish even with a modest increase in total stocks, a surprisingly large build in distillate fuel stocks along with a surprise draw in gasoline stocks but a smaller than expected draw in crude oil inventories. Total implied demand was marginally higher with distillate fuel and Jet demand leading the way. Refinery utilization rates decreased modestly on the week to 92% of capacity a decrease of 0.7% 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 increased by 4.5 million barrels after increasing modestly the week before. The year over year surplus widened to 35.6 million barrels while the surplus versus the five year average for the same week widened to 45.1 million barrels. By all measurements total oil supply in the US is still well balanced to comfortable irrespective of the evolving geopolitical risk in the Middle East.
Crude oil inventories decreased (by 0.8 million barrels) versus an expectation for a more 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. Even with a decrease in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 21.9 million barrels while the surplus versus the five year average for the same week came in around 37 million barrels. Crude oil imports increased strongly on the week.
PADD 2 crude oil inventories increased by about 0.7 million barrels while Cushing, Ok crude oil inventories decreased by 0.5 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 decrease in crude oil inventories from Cushing this week is bearish for the Brent/WTI spread.
Distillate stocks surged for the second week in a row versus an expectation for a modest seasonal build. Heating oil/diesel stocks increased by 2.6 million barrels. The year over year deficit came in around 21.5 million barrels while the five year average remained in a deficit of about 19.4 million barrels. The major reason for the underperformance in distillate inventory pattern this year has been the growing level of exports.
Gasoline inventories decreased modestly versus an expectation for a modest build in stocks as the summer gasoline driving season is now at its height. Total gasoline stocks decreased by about 1.8 million barrels on the week versus an expectation for a modest build. The deficit versus last year came in at 5.8 million barrels while the deficit versus the five year average for the same week was about 7.1 million barrels. The main reason for the inventory draw was due to a large reduction in production and imports this week. It seems refiners may be prematurely moving to more of a max distillate production mode at the expense of gasoline especially since their is only about a month of so left the summer driving season.
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 everything in the complex decreased on the week except for distillate which increased more than expected. Overall this week's report was biased to the bullish side.
I still think the oil price is overvalued. However, the combination of the evolving geopolitical concern around Iran and the Middle East as well as the view that the global Central Banks are more likely to ease monetary policies further as well as initiating a new round of stimulus should contribute the market stabilizing (after some profit taking selling). For the moment the oil complex is trying to establish a new trading range.
I am keeping my view at neutral as the hot weather that has persisted across major portion of the US has subsided a bit and the rest of July is not likely to be as hot over the entire US as it was for the second half of June. In addition the economics of coal switching now favors coal which will result in a reduction in Nat Gas demand. Finally Nat Gas at current price levels is overvalued and is likely to decline further and settle into the $2.25 to $2.70 trading range.
This week the EIA will release the weekly Nat Gas inventory report on its normal schedule... today at 10:30 AM. This week I am projecting the seventh net injection into inventory of 35 BCF. My projection for this week is shown in the following table and is based on a week that experienced a fair amount of Nat Gas cooling related demand but not as much as experienced back in June. My injection forecast is based on the fact that major portions of the US experienced above normal temperatures. My projection compares to last year's net injection of 67 BCF and the normal five year net injection for the same week of 74 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 and within the range of underperformance of injections we have seen over the last several months.
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 516 BCF. The surplus versus the five year average for the same week will narrow to around 477 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are currently lining up between about 14 to 45 Bcf (basis Reuters) with the consensus around 34 BCF.
Currently markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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