Oil prices ended the shortened trading week on a positive note as US equities hit a new record highs. The externals kept oil prices bid as liquidity was below normal ahead of the long holiday weekend. The macroeconomic data out of the US was mixed with initial jobless claims rising for the first time in about a month while the final revision of the fourth quarter GDP was adjusted upward to 0.4 percent but below the market consensus of 0.5 percent. A slight improvement in US growth in the fourth quarter but still a very slow and below normal growth rate for this stage of the US economic recovery.
So far this has been an interesting investing/trading year with the major risk asset markets mixed after just about all of them started the year with strong gains. The first quarter market pattern has been uneven and strongly impacted by the cloud of uncertainty still hanging over the global economy. The outcome for the first quarter is shown in the EMI Investment chart below.
Unlike the first quarter of 2012 when Nat Gas was the largest loser on the EMI Investment Chart this year Nat Gas is actually the largest percentage gainer for Q1 of 2013. After a mild start to the winter heating season of 2012/2013 the back end of the winter has been much colder than normal resulting in a strong level of Nat Gas heating related demand and thus an accelerated destocking of the surplus of Nat Gas in inventory. In fact current Nat Gas inventories are significantly below last year and are just about at the same level as the normal five year average for this time of the year.
Rounding out the energy complex RBOB gasoline increased by double digits for the quarter… a positive sign for the refining sector but a negative for the US consumer… although the national average US retail gasoline price is currently almost $0.30/gal below last year at this time. WTI was the only other energy commodity to show a gain for the quarter as both Brent and HO declined across Q1.
The big storyline in the energy pricing area was the significant narrowing of the Brent/WTI spread. The spot spread declined by almost 34 percent or $6.50/bbl over a timeframe when the North Sea has been operating at normal to even above normal levels, geopolitics were not currently impacting the flow of oil and crude oil stocks in the mid-west region of the US have been declining… although they are still above last year and the normal historical level. Crude oil inventories in Cushing, Ok seems to have peaked during the first part of the year and have been slowly declining since then. The destocking pattern is still a slow and shallow pattern and could be reversed at any time if refiners in PADD 2 experience any unscheduled issues going forward.
Equities were the other investment area that showed modest gains for the first quarter of 2013 but all global equity markets did not participate fully in the rally. The EMI Global Equity Index (an index of 10 global bourses) actually declined marginally for the quarter with Brazil, China and Hong Kong leading the EMI Index lower. On the top end of the ladder Japan's bourse has been one of the high flyers of Q1 as the Yen has declined almost 8 percent on the quarter… a very positive benefit for this export driven economy. As shown on the chart the US equity markets performed well over the quarter with the Dow and S&P indices both showing double digit gains for Q1 as well as hitting new all-time highs. The NASDAQ was the laggard in the US as many tech stocks struggled during Q1 led by a struggling performance by Apple.
Overall equity markets have performed rather well in spite of the high level of uncertainty that has plagued many regions of the world. Europe remains in recession, the US is still struggling to solve its budget and debt issues and the main economic high flyers… like China are not growing at the pace that many expected them to expand at. All in all it turned out to be a decent quarter for equities which was mostly a positive for energy prices and the broader commodity complex as rising equity markets tend to be a leading indicator for expanding global economic growth and thus an increase in commodity demand.
Unlike last year at this time when metals and agricultural commodities were the high flyers both of these sectors performed poorly during the first quarter. Metals and agricultural commodities were lower across the board while the US dollar firmed over the quarter adding negative pressure on both of these sectors.
Gold ended the quarter in negative territory after over a decade of consistent gains. The spot gold futures contract declined by 4.83 percent. Silver performed even worse than gold falling by 6.4 percent over the quarter as investors viewed both of these safe haven commodities as not the place to park money with many equity markets in a modest rally so far this year.
Copper was down 7.05 percent as the number one consumer of Copper... China is experiencing a slow growth pattern in its economy. Copper is an industrial metal that is highly dependent on the Chinese economy (to a lesser extent other emerging market economies). China and the rest of the emerging market economies were lackluster in 2013 so far and thus the decline in copper prices.
What a difference a new year makes… more crops and what seems to be a major improvement in the drought stricken farmland areas of the US. The main agricultural commodities declined across the board in Q1 with Wheat the largest loser declining by 11.6 percent. Soybeans and corn declined only marginally in Q1 by 0.99 percent and 0.43 percent, respectively. The grains markets declined strongly at the end of last week on a bearish USDA report that showed higher than expected stockpiles of Corn, Wheat and Soybeans.
The US dollar has been in a modestly strong uptrend throughout most of the first quarter of 2013. The US dollar index increased by 4.13 percent while both the euro and yen declined modestly in Q1. The euro has been in decline due to the ongoing debt issues in the region… Cyprus the latest as well as the simple fact that Europe remains in its second recession in less than five years. The yen has been on the defensive as the Japanese government gets even more aggressive in its quantitative easing program to try and finally jump start an economy that has been lackluster for years.
Over a shorter timeframe the oil complex ended higher across the board last week except for the Brent/WTI spread which narrowed by 6.19 percent or $0.99/bbl. The spot WTI contract was the largest percentage gainer for the week even as crude oil inventories in the US increased more than expected with gains in inventories in both Cushing and PADD 2. The big feature of the week in the oil complex was yet another strong narrowing of the Brent/WTI spread as the North Sea continues to operate at normal production levels.
WTI increased more than Brent resulting in another narrowing of the spot Brent/WTI spread on the week. The spot WTI contract increased by 3.76 percent or $0.3.53/bbl while Brent gained about 2.37 percent or $2.54/bbl. Crude oil stocks in PADD 2 increased as did Cushing stocks as refinery runs in PADD 2 decreased by 3.9 percent or a little more than half as much as the previous week's gain in run rates.
The May Brent/WTI spread was lower for the seventh week in row. The May spread declined by 6.19 percent or $0.99/bbl. It is continuing to trade well below the level it was at just prior to the announcement of the Seaway pipeline bottleneck at the end of January. The spread was in a narrowing trend until the announcement hit reversing the direction and sending the spread higher by about $6/bbl. The spread has been declining since the third week of February and barring any new unscheduled interruptions in the North Sea the spread should continue in a narrowing trend with bouts of short covering from time to time.
I expect the spread to slowly continue to decline with the decline accelerating once the spring refinery maintenance season is completely over and crude oil demand returns to more normal levels. At the moment even though it appears that Cushing is in the early stages of a destocking trend last week Cushing stocks (and PADD 2 inventories) built marginally suggesting that the declining pattern may be slowing for the moment. That said the spread has narrowed strongly for the last seven weeks and I would raise the caution flag that there is likely to be a round of short covering that could firm the spread before starting another leg down... especially with stocks increasing in Cushing and PADD 2 last week and refinery run rates declining in the region.
On the distillate fuel front the Nymex May HO contract increased by 2.34 percent or $0.0694/gal on the week even as distillate fuel inventories declined on the week on temperatures that were winter like over parts of the US during the report period. Gasoline prices increased after a larger than expected draw in inventories last week. The May Nymex gasoline price increased by 3.03 percent or $0.0913/gal this past week.
The May Nat Gas futures contract increased by 1.83 percent or $0.073/mmbtu on the week after successfully breaching and staying above the technical and psychological $4/mmbtu level.
An upside miss in Thursday's weekly EIA inventory report was viewed by the market as bullish but the futures contract traded throughout the week ending session on a buy the rumor, sell the fact type of pattern. The net withdrawal was modestly larger than what the market was expecting. The market has been expecting a bullish inventory report since the previous week and based on Thursday's trading activity a bullish expectation was already priced into the market. This week's report should also show a net withdrawal from inventory versus injections for both last year and the five year average. The net withdrawal will be lower than last week's level but it is likely to be enough to move total inventories in line with the normal five year average level.
However, the latest NOAA forecast is now projecting a major break in the atypically cold temperatures that have been in place for the entire month of March. Both the six to ten day and eight to fourteen day forecasts are showing a warming trend hitting most of the US with above normal temperatures across the entire US settling in about April 7th. Spring like weather may finally be starting to arrive. Based on this forecast there is likely to be a quick end to Nat Gas heating related demand during the first week of April. At the moment the fundamentals were supportive but may now be starting to transition.
On the financial front equity markets around the world were mostly higher on the week. The EMI Global Equity Index is now showing a small loss for the year of 0.1 percent after gaining 0.78 percent last week. Global equity markets were a positive price driver for the oil complex last week.
The euro was lower driven by the evolving situation in Cyprus. Last week the global equity markets were a neutral to slightly positive price driver for oil and most commodity markets. I am maintaining my view of the entire complex at neutral but with a cautiously bullish bias as the oil complex appears to have formed a short term technical bottom. HO and RBOB have been trending higher but within the confines of a trading range. They are both currently trading near the upper end of their respective trading ranges. WTI has now breached its range resistance level with Brent hovering very near its range breakout level. The complex is showing signs that the next move could be a move to the upside.
I am downgrading my view to neutral for Nat Gas as the forecasted weather pattern now appears to be a negative for heating related Nat Gas demand. I do not expect prices to collapse but I view the moderating temperatures to result in the Nat Gas price rally likely topping out at this time as the lower demand shoulder season finally arrives. Markets are mostly lower ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
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