Oil prices are higher across the board this morning after starting the week out on a negative note. As has been the case for the last several weeks the refined products market... in particular RBOB gasoline is leading the complex higher. As has been the case for weeks the oil price battle continues to be between the headwinds from the slowing of the global economy and thus the potential for a slowing of global oil demand growth versus the tailwinds from what all of the money printing by central banks from around the world might do to the economy and inflation as well as the tightness of the nearby fundamentals for gasoline... in particular in California.
Even though refined product inventories have been underperforming versus the same historical timeframe in the US there is no shortage of crude oil anyplace in the world. In fact Saudi Oil Minister Naimi said today that he expects Saudi Arabian crude oil production to remain around the 10 million barrel per day level at least through November. He also went on to say that Saudi Arabia has the ability to produce at the rate of 12.5 million barrels per day ... although the world does not require that level of Saudi production at the moment. The extra Saudi production is offsetting any possible issues with lost production out of Iran due the sanctions. At the moment the main reason why oil prices are still at the level they are at is mostly related to the firmness in refined product prices that has been supported by a rash of unscheduled refinery issues which have had a negative impact on distillate and gasoline production and thus atypical declines in inventory for this time of the year.
On the European economic front the market is a tad more comfortable this morning as EU Finance Ministers began meetings to discuss the evolving sovereign debt issues in Europe. The EU Ministers were also happy with Greece's effort to cuts its budget and try to rebuild its economy. That said they have also given Greece a list of 89 policy steps before the October 18-19 leaders summit but left open whether the next 31 billion euro loan installment will be paid out in one payment or spread over a period of time. I think the EU leadership has come too far in trying to solve these issues and I expect the next loan payment will be provided to Greece relatively quickly and in one payment.
The IMF cut its global economic growth forecast as a result of the ongoing EU debt crisis as well as the slowing of the US and China economies. The IMF projected the global economy will grow by just 3.3% for 2012 or the slowest rate of growth since the global recession hit. They projected a slight growth increase to 3.6% for 2013. Yesterday the World Bank cut its east Asian forecast and in particular projected China's economic growth could slide to a 13 year low in 2012 as a very slow global economic recovery is having a negative impact on China's export markets as well as its internal demand.
The vast majority of macroeconomic data and economic forecasts have continued to support the growing concern over the slowing of the global economy and for oil market participants the negative impact this will have on oil demand growth... especially the projections for slow growth out of Asia & China as this area of the world is the main oil demand growth engine as both the US and Europe are expected to see a reduction in oil consumption in both 2012 and 2013.
In spite of all of the economic growth slowing talk around the market global equities have been able to add value so far this week as shown in the EMI Global Equity Index table below. The Index is now higher by 0.3% for the week resulting in the year to data gain widening to 7.3%. The biggest gainer in the Index this week is China which is playing a bit of catch up after being closed all of last week for a holiday. In addition many market participants are still expecting the Chinese government to get more aggressive with further accommodative monetary policy and possibly even another stimulus type program. The Chinese bourse still remains the only equity market in the EMI Index that is still in negative territory for the year. Global equities have been marginally supportive for oil prices as well as the braider commodity complex so far this week.
In the tropics there are few weather patterns to keep on the radar. As of this morning there are two areas.. one a couple hundred miles northeast of the Bahamas and one about 1,050 miles east of the Windward Islands. Neither pattern has a very high probability of strengthening into a tropical cycle over the next forty eight hours nor is their direction currently projected yet. Thus nothing needs to be done on the oil or Nat Gas front other than to simply watch the progress over the next few days.
The weekly inventory cycle has been delayed by one day due to the Columbus Day holiday on Monday. The weekly oil inventory cycle will begin with the release of the API inventory report Wednesday afternoon and with the more widely followed EIA oil inventory report being released Thursday morning at 11:00 AM EST. With the global economy and oil fundamentals becoming more the focus of the trading and investing community this week's oil inventory report could be a price catalyst especially if the actual outcome shows a large deviation from the projections. However, any inventory reaction could be short lived if the macroeconomic data remains the main focus of most market players.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to hold relatively steady even as there have been a rash of refinery issues over the last several weeks. I am expecting a modest build in crude oil inventories, and a build in both gasoline and distillate fuel stocks. I am expecting crude oil stocks to increase by about 2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 29.1 million barrels while the overhang versus the five year average for the same week will come in around 35 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would normally be bearish for the Brent/WTI spread in the short term but the spread is currently trading at the highest premium to Brent in over a year. The slow return from maintenance in the North Sea has been the main driver that has resulted in the Nov Brent/WTI spread now trading over the $22.50/bbl level as of this writing. The widening of the spread should begin to ease once the North Sea returns to a more normal production level over the next month or two.
With refinery runs expected to increase by 0.3% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year deficit coming in around 12.7 million barrels while the deficit versus the five year average for the same week will come in around 7.8 million barrels.
Distillate fuel is projected to increase by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 28.9 million barrels below last year while the deficit versus the five year average will come in around 26.1 million barrels.
The following table compares my projections for this week's report (for the categories I am making projections) with the change in inventories for the same period last year. As you can see from the table last year's inventories are not in directional sync with this week's projections. As such if the actual data is in line with the projections there will be a significant change in the year over year inventory comparisons.
The oil complex has breached all of its current support levels and as such I am keeping my view at neutral for today with an eye toward the bearish side if the correction continues further. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics has moved toward the background for the short term.
I am keeping my Nat Gas price view at neutral with a neutral bias as the market seems to entering a downside correction mode. Even though current prices favor coal over Nat Gas (based on a macroeconomic comparison) the market is now more focused on the upcoming winter heating season and what it may due to Nat Gas demand.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*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.
Copyright CME Group All rights reserved.