Although equity markets had a moderately strong day during the US trading session on Thursday the oil complex remained under pressure as the spot Nymex refined products expired in negative territory for the day dragging the rest of the complex lower. Oil had the first down month since October with WTI at the lowest price of the year and Brent trading around the mid January lows. The spot Nymex Heating oil price is now back to levels not seen since mid-Jan whereas the spot RBOB futures contract has retraced back to end of January levels. Thus at the moment the rally that has been in play for a major portion of this year has clearly turned into a downward trending market and something that now looks deeper than just a short term round of profit taking selling.
The technicals have broken down throughout the oil complex with the only positive technical indicator at the moment is the fact that all of the commodities in the complex are currently oversold and now susceptible to a round of short covering in what is an evolving downtrend. We have had over a week of down days with most of the commodities in the complex now trading around technical support levels.
Overnight the oil complex did not get any fundamental support as OPEC output climbed as a gain in Libyan outweighed a cut by Saudi Arabia according to the latest Bloomberg survey. Saudi Arabia is estimated to be around 9 million barrels per day according to the survey or the lowest level since 2011. On the other hand the IEA said in their quarterly report that OPEC production was lower in both January and February and global oil stocks were drawing at about 1.3 million barrels per day over the past two month. However, OECD stockpiles are slightly above where they were last year at this time. At the moment the overall supply and demand balances look biased to the surplus side with no shortages of oil anyplace in the world. The supply interruption risk premium has been slowly eroding from the price of oil over the last several weeks.
On the economic front which has strong implications to the demand side of the oil complex (as well as broader traditional commodities) China's manufacturing indices showed a slower than estimated rate of expansion. The official PMI was 50.1 for February, the lowest in five months and down from January's 50.4 according to the latest from the National Bureau of Statistics and China Federation of Logistics and Purchasing. In addition a separate data point released from HSBC and Markit economics declined to a four month low of 50.4 for February compared to 52.3 in January. Although both of these data points suggest that manufacturing is slowing in China it is still marginally above the 50 threshold which indicates expansion in this sector.
China is the main economic and oil demand growth engine of the world. China is a manufacturing oriented economy dependent on the export market. If China's manufacturing is slowing it strongly suggests that oil consumption in China is going to also slow and not grow at the rate that has been projected by the various agencies like the IEA. Last night's data out of China is certainly not catastrophic as the manufacturing index is still above the expansion threshold but it is a signal that the economic growth rate in China may also be slowing as we have seen by its major export customers the US and Europe.
Yesterday the second reading of the fourth quarter GDP in the US came in below expectations but above the first reading which showed a small contraction. The GDP came in at a growth rate of 0.1% for the fourth quarter versus a market consensus looking for 0.5% growth but above the negative 0.1% from the first reading. With Europe in recession and the US barely showing any growth at all oil consumption is likely to underperform unless the global economy starts to pick up some momentum in the near future.
Since it is March 1st and a deal has not been announced in the US by the DC politicians the sequester cuts are now officially in play. There is a meeting today between the President and the leaders of Congress but as it looks to me the meeting will be nothing other than a photo op with both sides blaming each other but promising to continuing to work toward a larger budget deal. The cuts will be gradual over the remaining months of 2013 and as I have been saying in the newsletter I do not believe that the catastrophic picture painted by the President... it is extremely overblown. This will turn out to be more of Y2K moment than a disaster. In fact the sequester cuts may be a golden opportunity for various government agencies to dig deep and focus on wasteful government spending and eliminate it. So far there has not been any reaction in the global risk asset markets due to the sequester no being in play.
The sell-off we have seen in the oil complex over the last week or so is reflective not only of the weakening technical pattern of these markets but certainly driven by the weakening global economy and thus potential for a slowing in oil consumption in 2013. All signs currently point to oil prices moving to even lower levels before reaching a turning point back to the upside. As mentioned above I do expect a round of short covering as this market is oversold but it may not be for a day or so as we could see some selling in equities today in the US after yesterday's end of the month window dressing session.
Global equity markets were mixed overnight as shown in the EMI Global Equity Index table below. The EMI Index is still showing a weekly gain of about 0.5% with Europe and US currently trading. Both of these regions are in negative territory and if it holds throughout the day we could see an erosion in the weekly gain. The EMI Index is showing a small year to date gain of 0.2% with Japan clearly holding the top spot in the Index with an 11.6% gain as the Yen falters bolstering this export driven economy. Australia remains in the second spot but for how long if China's economy is actually starting to slow down. China is one of Australia's major resource customers. Overall the global equity markets have been a negative for the oil complex and the broader commodity markets over the last several weeks.
I am keeping my view of the entire complex at cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... another round of profit taking selling as we experienced yesterday.
I am maintaining my Nat Gas view and bias at neutral as the weather forecasts and nearby temperatures are supportive. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.
Yesterday's Nat Gas inventory was bullish in that it came in greater than the expectations and certainly showed a larger net withdrawal then both last year and the five year average. Shortly after the data was released there was a very volatile reaction with prices tumbling strongly at first only to recovery very quickly back into positive territory for the session. In fact the spot futures contract made an attempt at breaching the upper range resistance level of $3.50/bbl (came very close) but failed to penetrate this level. Recall on Wednesday the market surged above resistance only to reverse and end well below the level.
As of this writing the futures market is still hovering very near the range resistance and level but could make another attempt at breaching this level sometime during Friday's trading session. As I have discussed in previous newsletters breaching of the upper resistance level intraday is not enough. The market is going to have close several days above the $3.50/mmbtu level to increase confidence that it is not yet another false breakout. The $3.20/mmbtu to $3.50/mmbtu trading range has been in play since November of last year and since then there have been several breaches of resistance that all turned out to be false breakouts as we saw yesterday. So until my aforementioned conditions are met I expect prices to remain in the trading range until proven otherwise.
Markets are mostly lower ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
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*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.