Oil prices still on defensive

 
on May 14 2013 8:54 AM

Oil prices are drifting lowering in overnight trading as the bearish fundamental outlook continues to weigh on prices. Both Brent and WTI have declined for the last several trading sessions with both now back into a new lower trading range. Although the IEA did not lower its oil demand forecast (see below for the highlights from today's report) it did paint a bearish picture on the supply side indicating that the market is biased to the oversupplied side of the equation. The short to medium term fundamental outlook remains the same… oil demand is faltering, supply is robust and growing and US crude oil inventories are at the highest level since the 1930's.

The spot Brent/WTI spread has continued to narrow this week although the downside momentum has slowed somewhat. The spread continues to trade below the $8 to $8.25/bbl new resistance area for the last week or so with the next significant technical support level around the $5.30/bbl level. So far the market has shrugged off the upcoming scheduled maintenance in the North Sea … in particular the Ekofisk field maintenance program for the month of June.

Production in the North Sea has been normal to above normal throughout most of this year so far. The upcoming maintenance program will reduce production of North Sea crude oil which should result in the a further slowing of the narrowing pattern of the spread and possibly even temporarily turning the spread around into a widening mode before resuming its next leg lower. The longer term trend for the spread remains a narrowing trend with expected rounds of short covering and widening along the way.

After adding value for the last two weeks the EMI Global Equity Index has retraced mildly so far this week. As shown below the EMI Global Equity Index has declined by about 0.7 percent for the week narrowing the year to date gain to 1.6 percent. Over the last twenty four hours nine of the ten bourses in the Index declined with Australia the only equity market to add value. The ranking of the bourses remains the same with eight markets still in positive territory for 2013. Japan remains on top of the Index with a 42 percent gain for the year with the US Dow a distant second showing a 15.2 percent year to date gain. Brazil remains at the bottom of the list with a loss for 2013 of 10.7 percent. Global equities have been a negative for oil prices so far this week.

The International Energy Agency released their monthly oil market assessment. The IEA actually raised its oil demand forecast (the first time in four months) marginally due to revisions to German gasoil consumption in 2012. This month only the EIA lowered its oil demand projection while OPEC kept their forecast the same as last month. Following are the main highlights from the IEA report.

• Oil futures prices declined in April on seasonally weaker demand. Brent fell by around $6.10/bbl to $103.40/bbl amid a surplus of light, sweet grades in Europe, and last traded nearly unchanged at $103.10/bbl. In contrast, WTI inched down by just $0.90/bbl to an average $92.05/bbl, and by early May bounced back up to $95.50/bbl.

• The WTI-Brent futures price spread fell to its narrowest in more than two years, contracting to about $7.75/bbl in early May from an average $11.35/bbl in April, $16.58/bbl in March and $20.75/bbl in February.

• The global oil demand forecast was raised by a marginal 65 kb/d for 2013, to 90.6 mb/d, due mainly to upward revisions to German gasoil data for 2012. The global growth forecast is unchanged at 795 kb/d.

• The non-OPEC supply forecast was raised by 50 kb/d to 54.5 mb/d for 2013 on rebounding output in South Sudan and strong North American oil sands and tight oil production. Annual growth remains projected at 1.1 mb/d after US and Australia data revisions raised the 2012 estimate by 0.1 mb/d.

• OPEC crude production rose by 200 kb/d to 30.70 mb/d in April, led by Iraq. The 'call on OPEC crude and stock change' for 2Q13 fell by 400 kb/d to 28.9 mb/d on higher OPEC NGLs and non-OPEC supplies. OPEC ministers gather in Vienna on 31 May to review the market outlook.

• OECD commercial oil stocks built by a counter-seasonal 14.9 mb in March, to 2 658 mb, after a steep Japanese build helped lift crude stocks by 32.4 mb. On a forward-cover basis, OECD product stocks fell by 0.6 day, to 31.2 days. Preliminary data suggest total oil stocks built by a further 27.7 mb in April.

• Global refinery runs will jump by an unusually steep 3.6 mb/d from April – the likely peak in seasonal maintenance – to August, thanks in part to new Saudi capacity and recovering throughput at Venezuela's Amuay plant after a 2012 fire. March runs exceeded expectations, following strong February margins and a Brent price dip.

This week's round of oil inventory reports will follow its normal schedule with the API data being released on Tuesday afternoon followed by the EIA report hitting the media airwaves at 10:30 am on Wednesday. My projections for this week's inventory report are summarized in the following table. I am expecting a small draw in crude oil inventories, a modest build in distillate fuel... as some areas of the US returned to spring like temperatures during the report period... and a small draw in gasoline stocks even as refinery runs are expected to show a small gain.

I am expecting crude oil stocks to decrease by about 0.2 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 13.7 million barrels while the overhang versus the five year average for the same week will come in around 33.1 million barrels.

I am expecting a modest build in crude oil stocks in Cushing, Ok as the Pegasus pipeline has remained shut down for all of the report period. This will be bullish for the Brent/WTI spread but as discussed in detail above other factors are in play which could dampen the impact of this driver.

With refinery runs expected to increase by 0.2 percent I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year surplus of around 10.3 million barrels while the surplus versus the five year average for the same week will come in around 4.5 million barrels.

Distillate fuel is projected to increase by 0.7 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 1.5 million barrels below last year while the deficit versus the five year average will come in around 15.8 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 some large differences compared to last year's changes. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for most everything in the complex.

I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. On the other hand the market has been pushing oil and other commodity values higher as more liquidity from advanced country central banks continues.

I am maintaining my view at neutral for Nat Gas and keeping my bias at cautiously bearish as lower prices may still be in the cards. The fundamentals are less supportive after last week's inventory snapshot. Markets are mostly lower ahead of the US trading session as shown in the following table.

Dominick A. Chirichella
dchirichella@mailaec.com

Follow my intraday comments on Twitter @dacenergy.

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