Oil markets are hovering around the unchanged level on news that the EU Finance Ministers finally agreed to another Greek finance deal. Yet another financial aid package for Greece suggests that Greece is not exiting the euro anytime soon nor is the euro currency about to collapse. In a world full of uncertainty this is one small positive step in the direction for a slow economic recovery in Greece and Europe. The Ministers agreed to emergency terms for Greece. They cut the rates on loans, suspended interest payments for 10 years, gave Greece more time to repay and developed a Greek bond buyback program. A deal that is favorable for Greece and one that should help their abysmal economy slowly working its way toward recovery.
Back to a more negative outlook the OECD released their latest economic assessment today. They said the global economy is facing a hesitant and an uneven recovery. Certainly any more negativity coming from the global economy will only result in oil demand growth slowing even further than what has already been forecast. Following are some of the highlights of this report:
The global economy is expected to make a hesitant and uneven recovery over the coming two years. Decisive policy action is needed to ensure that stalemate over fiscal policy in the United States and continuing euro area instability do not plunge the world back into recession, according to the OECD's latest Economic Outlook.
"The world economy is far from being out of the woods," OECD Secretary-General Angel Gurría said during the Economic Outlook launch in Paris. "The US 'fiscal cliff', if it materializes, could tip an already weak economy into recession, while failure to solve the euro area crisis could lead to a major financial shock and global downturn. Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs, in the United States, in Europe, and elsewhere," Mr. Gurría said.
GDP growth across the OECD is projected to match this year's 1.4% in 2013, before gathering momentum to 2.3% for 2014, according to the Outlook.
In the United States, provided the "fiscal cliff" is avoided, GDP growth is projected at 2% in 2013 before rising to 2.8% in 2014. In Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014. The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014.
After softer-than-expected activity during 2012, growth has begun picking up in the emerging-market economies, with increasingly supportive monetary and fiscal policies offsetting the drag exerted by weak external demand. China is expected to grow at 8.5% in 2013 and 8.9% in 2014, while GDP is also expected to gather steam in the coming years in Brazil, India, Indonesia, Russia and South Africa.
Labor markets remain weak, with around 50 million jobless people in the OECD area, the Outlook said. Unemployment is set to remain high, or even rise further, in many countries unless structural measures are used to boost near-term employment growth.
The euro area crisis remains a serious threat to the world economy, despite recent measures that have dampened near-term pressures. Adjustment of deep-rooted imbalances across the euro area has begun, but much more is needed to ensure long-term sustainability, including structural reform in both deficit and surplus countries.
The Outlook suggests a possible positive scenario could arise if decisive policy actions are taken to improve business and consumer confidence, and to boost growth and jobs worldwide. The rapid and broad implementation of structural reforms, not least in labor and product markets, is key to this scenario.
Global equity markets gave back some of last week's gains over the last twenty four hours as shown in the EMI Global Equity Index table below. The EMI Index lost about 0.6% over the last twenty four hours narrowing the year to date gain for the Index to 5.8%. After last week's rally there are now four bourses showing double digit gains for the year with China still the only bourse in negative territory for 2012. Unless the Chinese equity markets stage a late year rally this could be the second year in a row of losses for the Chinese bourse. So far global equities have been a slight negative for the oil prices as well as the broader commodity complex.
The weekly oil inventory cycle will follow its normal schedule this week. The weekly oil inventory cycle will begin with the release of the API inventory report on Tuesday afternoon and with the more widely followed EIA oil inventory report being released Wednesday morning at 10:30 AM EST. With geopolitics less of an issue or price driver than it was last week the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals a close second. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest build in crude oil inventories, a build in gasoline and a small build in distillate fuel stocks as the weather was only marginally colder than normal over the east coast during the report period. I am expecting crude oil stocks to increase by about 1.2 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 41 million barrels while the overhang versus the five year average for the same week will come in around 42.1 million barrels.
I am expecting a modest build in crude oil stocks in Cushing, Ok even as the Seaway pipeline is still pumping. However,refinery maintenance programs in the region are resulting in a building in crude oil stocks. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading at a relatively high premium to Brent and very near the highs recently hit. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Jan Brent/WTI spread still trading around the $23/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 and the situation in the Middle East quiets down.
With refinery runs expected to increase by 0.3% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.0 million barrels which would result in the gasoline year over year deficit coming in around 8.4 million barrels while the deficit versus the five year average for the same week will come in around 4.5 million barrels.
Distillate fuel is projected to decrease by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 25.2 million barrels below last year while the deficit versus the five year average will come in around 30.3 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 mostly in directional sync with this week's projections. As such if the actual data is in line with the projections there will be minimal changes in the year over year inventory comparisons for crude oil.
I am keeping my view at neutral with a bias to the neutral side for today primarily due to the evolving geopolitical situation in the Middle East and the Greek deal on financial aid. At the moment there is still no shortage of oil anyplace in the world and the part of the risk premium in the price of oil in anticipation of a spreading of the fighting taking place between Israel and Hamas as well as the civil war in Syria is still in place.
The geopolitical risk has been the main bullish price driver for oil as the current fundamentals as well as the slowing of the global economy are both biased to the bearish side for oil. In the short term the price of oil will move based on the evolution of the situation in the Middle East and the markets view as to the state of the global economy. This is still an event driven market for oil at the moment.
I am keeping my Nat Gas price view at neutral as the fundamentals and technicals are once again suggesting that the market may have topped out for the short term. I anticipate that the market will remain in a trading range until it becomes clearer as to how the heating season will evolve. 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 in the early stages of the winter heating season.
Markets are mixed heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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