Greece and the broader euro zone continue to dominate the risk asset market sentiment as another trading week gets underway. Europe remains unstable and the cloud of uncertainty that has been enveloping the world markets has not changed much over the weekend even though it looks like there is a deal in Greece. On Friday Papandreou survived a no confidence vote with negotiations ongoing since then to form a new coalition government with Papandreou out of the picture once the new government is in place. As the details of the Greece deal continue to emerge the market is also starting to look at Italy's leader as he may be in jeopardy of holding onto power.
While the turmoil continues in the individual EU member countries the EU Finance ministers will meet today in Brussels to start the process of working out the details of the October 26st macro agreement brokered by Merkel and Sarkozy insofar as how it will work, the size of the bailout out fund and if and how it will be levered, etc. So as one can see the devil is in the details and this is also adding worry and concern to the trading and investing community.
As it looks at the moment this will be another week dominated by the 30 second news snippets hitting the media airwaves from Europe sprinkled with moments of price impact from the normal price drivers in the markets...earnings, macroeconomic data and oil fundamentals like inventories and forecast reports. So far third quarter earnings have been mostly positive with the majority of companies that have reported either exceeding or meeting analyst expectations on both the top and bottom lines...that does suggest that the global economy is still generating value and growing...albeit slowly. The macro economic data has also been more biased to the positive side as demonstrated by last week's non-farm payroll number out of the US which also showed some slow growth in the US economy. This is not a heavy week for economic data with consumer credit numbers today, initial jobless claims later in the week ending the period with the Michigan Sentiment Indicator.
On the other hand this is an active week for the release of oil fundamental data with the normal API & EIA oil inventory reports (regular time and schedule) accompanied by the release of the monthly EIA, IEA and OPEC forecasts. I am not expecting much of a change in the forecasts by the three organizations this month versus last month as the assumptions that they normally use for their forecasts have not changed all that much. For a starting point I have included a summation of last month's forecasts from all three organizations. Although I do not expect much of a change in their forecast for oil demand growth they may increase their estimates for forward supply a bit to incorporate more Libyan oil flowing into the market place over time. The EIA report will be issued tomorrow, OPEC's report is on Wednesday and the IEA report comes out on Thursday morning.
In the category of interesting the following chart looks at the changing pattern of US oil consumption. The chart is simply the weekly EIA total oil implied demand number subtracted by the weekly total refined product export number leaving what I would like to simply categorize as internal US consumption. The chart is interesting from several levels. First internal demand has not only been declining since peaking in early 2005 (well before the financial crisis and the spike in prices in 2008) but it is now back to levels not seen since the mid-1990's. So interesting in that the US is becoming more energy efficient in its habits and uses of oil. Also interesting from the perspective that the US dependence on imported oil has decreased considerably when only looking at internal consumption as export consumption is discretionary. The US is now exporting about 2.75 million barrels per day of refined products. I know it is not an apples to apples comparison but I still find it interesting that the total US refined products exports of around 2.75 million barrels per day would rank the US as the third largest exporter in OPEC behind only Saudi Arabia (10 mmbpd in Sep) and Iran (3.55 mmbpd in Sep). The US is now one of the major export refining centers in the world...and that is very interesting.
Even with the growth in exports of refined products total (crude and refined products) US imports have declined from about 14 million barrels per day back in 2005ish to around 11 to 11.5 today. When one nets the total imports and exports US import requirements for internal consumption is now around 7.8 million barrels per day. The import trend has changed in the US and with the potential for more oil from Canada (assuming the infrastructure projects get approval) along with the potential of mainstreaming the ever growing abundance of shale gas and possibly soon to be shale oil as more and more drilling rigs are deployed back to the oil sector. In fact the latest data out of Baker Hughes this week shows rigs deployed to oil at a 24 year high. There is a major change quietly taking place in the US and if the government would create a few more tailwinds instead of the headwinds it has been creating the energy sector can accelerate its path to energy independence as well as contributing significantly to the recovery of the US economy (jobs, jobs and possibly more jobs)...just some food for thought.
As the situation in Europe unfolded by the time the end of the week arrived most risk asset markets ended mixed. Last week was all about Greece as discussed above which is continuing into today's session. The action and volatility last week was in all of the oil and commodity markets as well as the global equity markets. Last week was all about market players acting around the cloud of uncertainty that continues to engulf all risk asset markets. Equity bourses were lower across the board as uncertainty increased around the global economy. Precious metals increased modestly even as cash headed back into the US dollar.
Over the last week the oil complex was mostly higher. Brent was clearly the leader of the complex increasing about 1.87% or $2.06/bbl. The Dec WTI contract ended the week marginally higher with a gain of 1.01% or $0.94/bbl. The Dec Brent/WTI spread widened modestly even as the inventory situation in the US continues to improve (improve defined as destock) but was impacted by more commodity indices indicating their plans to overweight Brent versus WTI in their index calculations. With last week's upside move in the spread I still view the spread as very overvalued.
On the distillate fuel front the Nymex HO contract increased as distillate fuel inventories decreased more than the expectation for a modest build while US distillate fuel exports continue to increase. Spot Nymex HO increased by 0.14% or $0.0043/gal. Gasoline prices increased on the week as gasoline stocks declined modestly. The spot Nymex gasoline price increased by 0.65% or $0.0173/gal this past week.
With not much new to drive the Nat Gas market either higher or lower at the moment the futures markets are still solidly in a trading range and have been pretty much in a range since the Dec contract became the spot Nymex contract month. In addition the spot Nymex Nat Gas market has been in a broader trading range since the middle of September. The Dec trading range has seen price holding between $3.98/mmbtu on the high side to about $3.73/mmbtu on the low side (that level is being tested as of this writing). The broader range has been trading from a low of $3.44/mmbtu to almost $4/mmbtu. This pretty much describes how the market has been trading throughout most of the current shoulder season and will likely continue to be the pattern until the onset of the upcoming winter heating season. Nat Gas decreased modestly as the shoulder seasons continues to linger leaving overall demand sluggish at best. On the week Nat Gas futures declined by 3.57% or $0.140/mmbtu.
On the financial front equity markets around the world ended the week lower. Fear of contagion coming from the southern EU member countries... is still a huge concern in the financial markets... ramped up a bit toward the second half of last week as the situation in Greece continued to unravel. Global equity values decreased as shown in the EMI Global Equity Index table below mostly driven by uncertainty & fear.
The EMI Index lost 1.6% on the week keeping the Index well below the bear market threshold level of 20%. The EMI Index widened its year to date loss to 12.2% with the US Dow still showing a gain for 2011. The US Dow is still in the top spot of all of the ten bourses in the Index while only five of the other nine bourses are still showing double digit losses for the year. Last week the global equity markets were a modest negative for oil prices as well as the broader commodity complex.
The US Dollar Index increased on the week as confidence faded from the euro which declined on the week. Cash that moved back into the safe haven of the US dollar started to quickly flow out of selected risk asset markets around the world with global equity markets at the top of the list. The currency markets are still in the midst of a major realignment (as evidenced by the Japanese intervention last week) as I have been warning for months. Cash flowed into gold (and the rest of the precious metals complex) which increased by 0.51% on the week.
WTI still trading above the $91/bbl level I am keeping my view and bias at cautiously bullish. As discussed above the EU is still in turmoil but some progress could come this week if Greece follows through on its plans for a new government. That said WTI & Brent will remain closely linked to the direction of the US dollar and the Euro and will remain in this pattern for the foreseeable future. The US dollar and Euro will both be impacted strongly by the outcome of the EU/Greece situation and as such oil prices will respond accordingly. Although oil prices are supported from a technical perspective I still do not like the risk/reward in the oil market and prefer the sidelines today until all of the news around Europe is digested.
I am still bearish and am becoming more convinced that there is more downside in the price of Nat Gas. Friday's trading session was a bit more volatile than what we have seen over the last week or so in that futures prices made a few passes once again at trying to breaching a key upside resistance level although the market failed and gave back most of the gains by the end of the session. Right now I would categorize the current market action as another key reversal which could result in Nat Gas prices moving even lower. I am still keeping my guidance at neutral and keeping my bias at bearish also to see how price activity plays out over the next several trading session. I must say in looking at the fundamentals it is still hard to be anything other than bearish.
Currently as a new day of trading gets underway in the US markets are mixed as shown in the following table.
Dominick A. Chirichella
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