After falling modestly for the first week in over a month oil prices are starting the new trading week in positive territory for WTI with Brent showing a larger gain. Refined product prices are also modestly higher as of this writing. The market began to run out of its upside momentum early last week as participants have raised their concern on the prospect for a faltering demand picture going forward.
The main oil demand growth engine of the world… China is showing signs of its economy switching into a slower growth mode than what has been experienced over the last decade. Over the last several weeks the macroeconomic data out of China has been disappointing especially for the manufacturing sector with the energy sensitive PMI Index now dropping into the contraction zone. This coupled with the latest order by the government to shut down surplus manufacturing capacity will certainly have a negative impact on oil demand going forward. Overnight the government also ordered a debt review by the National Audit Office on an urgent basis. There will be more to this story going forward.
On the OPEC front with demand slowing OPEC is likely heading into a very important meeting in December as they address demand issue as well as the rising production in non-OPEC countries… especially the US. Yesterday a Saudi Prince and business man… Saudi Prince Alwaleed told Oil Minister Ali Al-Naimi in an open letter that the kingdom won't be able to boost its output capacity to 15 million barrels a day as planned and that rising U.S. production from shale formations may reduce American demand for imported crude as reported in a Bloomberg article today.
The prince published the letter yesterday on Twitter, saying there's a "clear and increasing decline" in demand for crude from members of the Organization of Petroleum Exporting Countries, particularly Saudi Arabia. The kingdom is now pumping below capacity as consumers cut imports, Alwaleed said.
This week's economic calendar is very active especially in the US with the ever important US nonfarm payroll data hitting the media airwaves on Friday. In addition the US Federal Reserve FOMC will meet this week with their rate decisions announced on Wednesday. The Fed is expected to remain status quo at this meeting but as usual the market will be parsing every word of the announcement to see if there are any new indications as to the plan for QE3 going forward.
Many of the global equity markets in the developed world… including the US have been primarily driven by the massive amount of stimulus coupled with near zero short term interest rates for the last several years. We are currently in a period where the easy monetary policies are likely closer to an ending rather than the beginning. As the Central banks around the world wean the markets off of the easy money policies it is almost certainly to have an impact on equities as well as oil and the broader commodity values. During periods of Central Bank policy transitions the markets are extremely volatile which is likely to be the environment that will be in play over the next six months or so especially in the US.
Tropical Storm Dorian fizzled out over the weekend and is now just a tropical weather pattern a couple hundred miles north of the Leeward Islands. At the moment this weather pattern only has a medium (50 percent) chance of once again becoming a tropical cyclone during the next forty eight hours. Currently this storm does not appear to be a threat to the oil and gas producing operations in the US Gulf Coast.
Over the last week risk asset markets in the EMI Weekly Price Board were mixed. Last week global risk asset markets lost some of their upside momentum as some markets were hit with modest rounds of profit taking selling. Oil prices were lower across the board with refined products markets leading the way down. The externals were a positive price driver for the complex but the prospects for a weaker fundamental picture offset the externals last week.
Last week the oil complex was negatively impacted primarily by the prospects that oil demand growth is starting to slow even as the externals were mostly positive for the oil complex. The oil complex ended with both WTI and Brent decreasing but with WTI losing much more than Brent as the September Brent/WTI spread recovered strongly after hitting parity early in the week. Refined products markets were lower on the week with both HO and RBOB gasoline falling more than crude oil and thus resulting in a negative week for all of the crack spreads including the widely followed 3-2-1 crack spread combination.
The September WTI contract decreased by 2.94 percent last week as US crude oil stocks declined modestly. WTI decreased more than the Brent contract resulting in a strong recovery of the September Brent/WTI spread on the week. The spot WTI contract decreased by $3.17/bbl while Brent decreased by only 0.83 percent or $0.90/bbl. Crude oil stocks in Cushing declined strongly as refinery runs in PADD 2 increased.
The September Brent/WTI spread widened by $2.27/bbl this week. Since early February of this year the Brent/WTI spread is lower by over $20/bbl or a decline of over 85 percent. The Brent/WTI spread remains in a longer term narrowing trend with bouts of short covering still expected from time to time as we saw last week. I have been suggesting that the spread will hit parity this year… and it has and now the market is in the midst of a short covering pattern for the spread.
Cushing inventories are now at the lowest level of the year (albeit still well above normal). With more outlets to move oil out of Cushing working their way to completion along with the existing logistics inventories in Cushing are more likely to remain in a destocking mode over the medium term which will be bearish for the spread.
On the distillate fuel front the Nymex HO contract decreased by 2.57 percent or $0.0793/gal on the week even as distillate fuel inventories decreased for the week. Gasoline prices decreased also after a surprise draw in inventories last week. The August Nymex gasoline price decreased by 2.53 percent or $0.0790/gal this past week.
The August Nat Gas futures contract decreased modestly on the week. The Aug contract decreased by 6.18 percent or $0.234/mmbtu and is now below the $3.58/mmbtu technical resistance level. The soon to be spot or September futures contract is now trading in the range with $3.41/mmbtu on the support side and $3.52/mmbtu now the new resistance level. From a technical perspective the market has been range bound for almost a month or during the heart of the summer cooling season (so far). This lack of price direction is certainly the outcome of the inconsistencies of the summer cooling season. There have been bouts of very hot temperatures for relatively short periods of time over confined parts of the US… much as we experienced two weeks ago along the north east coast. In fact during the heat wave in the New York area the temperatures were approaching the 100 degree F level with temperatures now in this area in the low 80's or almost a 20 degree F reversal in temperatures.
With the Nat Gas market almost entirety weather dependent this time of the year the support coming from the call on Nat Gas for weather related power demand has also been inconsistent. The latest NOAA six to ten day and eight to fourteen day forecasts are still not supportive for a significant call on Nat Gas for power generation to meet cooling needs. For the period July 31st through August 11th there are only minimal pockets of above normal temperatures forecast (west coast) with most of the rest of the country now expecting below normal temperatures. Based on the latest forecasts if the actual weather is in sync with the projections weekly Nat Gas inventory injections are likely to over perform during the forecast timeframe.
On the financial front equity markets around the world were higher with the US market higher on the week while the broader EMI Global Equity Index increased by 1.5 percent. The year to date loss for the EMI Index is now at 2.8 percent. Global equity markets were a supportive price driver for the oil complex for all of last week.
The euro and Yen were higher on the week while the US dollar Index decreased modestly. Last week the US dollar was a positive price driver for oil and most commodity markets.
I am maintaining my view at neutral with a bias at cautiously bearish for the short term as the downside correction may continue into next week. I am continuing to fly the caution flag that the current round of profit taking selling could continue for a few more days.
I am downgrading my Nat Gas view and bias at neutral based to cautiously bearish on a less supportive short term temperature forecast. The fundamental picture is likely to begin to shift as the temperatures across the US does not appear to be moving back to warmer than normal weather.
Markets are mixed heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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