Oil prices starting the session lower

on May 09 2013 8:38 AM
Brent Crude Oil

Oil prices are drifting lower after a positive trading session in WTI on Wednesday. Although WTI traded in positive territory throughout most of Wednesday's session the rest of the complex struggled to add gains. WTI gained on the back of a lower than expected build in US crude oil inventories along with the third week in a row of declines in Cushing inventories. That said the overall oil fundamentals remain bearish with crude oil stocks still at all-time record highs. In addition there is no sign that global oil consumption is likely to go through a sudden growth spurt anytime soon.

As has been the case for months the massive amount of monetary stimulus coming from the advanced world economies has been propping up selected equity and commodity markets along the way… including the oil complex. Today the Bank of England will announce if there are any changes to its QE strategy. The market is expecting a status quo outcome. Although the fundamentals have a bearish bias the market is not going to decline strongly anytime soon as long as the easy monetary polices of the developed world economics continue. I see no signs of any of the current programs in play (US, UK, Japan, ECD, etc.) changing anytime soon.

The June Brent/WTI spread moved back into its narrowing pattern after a one day short covering rally. The decline in Cushing inventories along with an increase in refinery utilization rates in PADD 2 were both bearish for the spread as it solidly breached the lower range support of $8.25/bbl and is now trading at the narrowest level since January of 2011 or back to the trading range that existed prior to the major widening moves seen over the last couple of years.

The spread has been in the process of slowly moving back to a more normal historical trading relationship between Brent and WTI. With crude oil utilization rates increasing in the region along with inventories looking like they are settling into a new destocking leg suggests that the spread is likely to continue its slow narrowing tend.

However, with maintenance on the horizon in the North Sea the narrowing trend could be derailed at some point if production in the North Sea becomes an issue over the next month or so. With demand in Europe still declining a reduction in North Sea production due to maintenance may not even be as much of an issue as it has been in past years. In any event it will have some impact on the narrowing trend of the spread. But for the moment the narrowing trend remains in play. The new trading range is $8.25/bbl on the upper end and $4/bbl on the lower end.

Global equity markets drifted lower yesterday as shown in the EMI Global Equity Index table below. The Index lost about 0.3 percent over the last twenty four hours narrowing the weekly gain to 1.36 percent. The Index is still showing a year to data gain of 2.4 percent or close to the highs hit earlier in the year. Over the last twenty four hours global equities have been a negative for oil prices but have been mostly supportive for the last month or so.

Wednesday's EIA inventory report was neutral with a slight bias to the bearish side as total commercial stocks increased modestly on the week. Overall I would categorize the report as slightly bearish after the smaller as expected build in crude oil stocks. Total commercial stocks increased by 3.5 million barrels as crude oil inventories increased slightly for the week. Refinery utilization rates increased by 2.6 percent to 87 percent of capacity suggesting that scheduled spring maintenance is starting to wind down. 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 3.5 million barrels. The year over year surplus came in at 24.2 million barrels while the surplus versus the five year average for the same week widened to 28.6 million barrels.

Crude oil inventories increased (by 0.2 million barrels) less than the market expectation. 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 around an 82 year high. With the increase in crude oil stocks this week the crude oil inventory status versus last year is showing a surplus of around 16 million barrels while the surplus versus the five year average for the same week came in around 32.9 million barrels. Crude oil imports increased strongly on the week.

PADD 2 crude oil inventories increased modestly by about 0.6 million barrels while Cushing, Ok crude oil inventories decreased modestly by 0.7 million barrels on the week. PADD 2 crude oil stocks are still showing a surplus of 9.5 million barrels versus last year and 24.5 million barrels versus the five year average. The Cushing area surplus came in at 5 million barrels versus last year and 14.6 million barrels compared to the five year average.

There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to a historically normal level of WTI trading at a premium over Brent. The modest decrease in crude oil inventories in Cushing was bearish for the Brent/WTI spread. Along with the robust supply situation in the North Sea as well as the faltering demand picture in Europe the spread remains in a narrowing trend as discussed in detail above. There was an increase in refinery utilization rates in PADD 2 (increase of 0.3 percent) suggesting that the return from the spring maintenance season may be ending and thus contributing to the crude oil inventory draw in PADD 2 this week Distillate stocks increased by 1.8 million barrels and greater than the market expectations as refinery run rates increased by 1.8 percent. Heating oil/diesel stocks increased modestly on a week over week basis as the weather was starting to finally become more spring like. The year over year deficit came in at 3.2 million barrels while the five year average deficit came in around 16.7 million barrels.

Gasoline inventories decreased modestly versus an expectation for a smaller draw. Total gasoline stocks decreased by about 0.9 million barrels on the week. The surplus versus last year came in around 8 million barrels while the surplus versus the five year average for the same week came in at about 3.2 million barrels. Gasoline stocks decreased in PADD 1 stocks (US East Coast) by 0.2 million barrels this week with the surplus versus last year coming in around 7.8 million barrels with a 5.8 million barrel surplus compared to the five year average for the same week. 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 for the complex. Overall this week's report was biased to the bearish side.

I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. On the other hand the market has been pushing oil and other commodity values higher as more liquidity from advanced country central banks continues.

I am maintaining my view at neutral for Nat Gas and keeping my bias at cautiously bearish as lower prices may still be in the cards. The fundamentals are less supportive after last week's inventory snapshot.

This week the EIA will release its inventory on its normal schedule and time... Thursday May 9nd at 10:30 AM. This week I am projecting the fourth injection of the season of 75 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest level of above normal temperatures during the report period. My projection compares to last year's net injection of 30 BCF and the normal five year net injection for the same week of 69 BCF. Bottom line the inventory deficit will narrow this week versus last year and the more normal five year average if the actual numbers are in sync with my projections. This week's net injection will be neutral with a slight bias to the bearish side when compared to the historical data.

If the actual EIA data is in line with my projections the year over year deficit will come in at about 750 BCF. The deficit versus the five year average for the same week will narrow to around 112 BCF. The early market consensus is projecting the fourth injection of the season in the range of 70 BCF to 95 BCF with the Reuters market consensus calling for a net injection of 83 BCF.

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

Dominick A. Chirichella
dchirichella@mailaec.com

Follow my intraday comments on Twitter @dacenergy.

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