Oil remains on the defensive

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With all three forecasting agencies (IEA, EIA and OPEC) painting a weakening picture for global oil demand growth for 2013 coupled with a disappointing weekly oil inventory snapshot this week the oil complex has been moving lower for the last several days. This month all three agencies reduced their growth forecast for oil. This is the third month in a row that the IEA lowered its projection. This has resulted in a bearish view starting to permeate around the market and a realization that slow economic growth in some countries like the US is not enough to result in a strong growth spurt in oil consumption.

From a fundamental perspective supply is still robust and outstripping demand growth. From a technical perspective WTI has failed to remain at the upper end of its trading range and is now positioned for a test at the lower support level of around $91.90bbl while Brent has breached its support level of around $104/bbl in overnight trading. The next stopping point for the Brent contract is now at $102.40/bbl. Neither Brent nor WTI look like they are ready to start the process of forming a technical bottom just yet.

Refined products are not faring any better than crude oil with Gasoil following Brent into a new lower trading range with the next support level around the $854/mton level. The spot HO contract is currently hovering near its range support level of $2.8650/gal while RBOB is still in the middle of its trading range but lower again today.

The Brent/WTI spread continues it narrowing move and is now trading below its most recent support level of $11/bbl. The spread is now moving into a new lower trading range with $8.25/bbl as the new support area or a level not seen since late December of 2011.

I have been suggesting that the spread will remain in a narrowing tend as the robust production level of the North Sea has more than trumped the logistical rebalancing taking place in the US mid-west due to the closure of the Pegasus pipeline. In addition with PADD 2 refinery runs increasing this week the market is expecting crude oil demand in the region to increase as scheduled maintenance starts to wind down over the coming weeks.

The May Brent/WTI spread has steadily declined since early March when it was trading around $19.40/bbl. Since then the spread has narrowed by almost $9/bbl or 46 percent. I remain of the view that the spread will be trading consistently at single digit levels during the second half of this year… possibly earlier if the production levels in the North Sea remain robust.

While oil has been struggling some equity markets have been hitting new all-time highs as shown in the EMI Global Equity Index table below. The US Dow has made several new highs this week while the Japanese bourse is nearing a 30 percent gain for the year. However, all equity markets are not participating in the current rally with only the US and Japan showing double digit gains for the year with three bourses still in negative territory for 2013. The Index is higher by 1.5 percent for the week with the year to date loss for the entire group of bourses in the Index sitting at 0.1 percent. Overall equities have been mostly a positive price support for oil and the broader commodity complex this week.

The IEA released their latest projection on Thursday and joined the EIA and OPEC in presenting a negative picture for global oil demand growth for 2013. Following are the main highlights of the IEA report.

Oil futures prices declined in March, under the weight of renewed pessimism for the global economic outlook. Weaker crude demand, amid exceptionally deep seasonal maintenance at refineries, added to the pressure. Brent was last trading at $106/bbl and WTI around $94/bbl.

The forecast of global demand growth for 2013 is little changed at 795 kb/d, to 90.6 mb/d, following slightly lower-than-expected 1Q13 deliveries. A projected contraction in OECD demand of 480 kb/d, led by a 340 kb/d decline in Europe, partially offsets growth of 1.28 mb/d elsewhere.

Global supply fell by 120 kb/d in March on lower OPEC output. Non-OPEC supply is forecast to average 54 mb/d in 1Q13, up 650 kb/d y o y but down 240 kb/d from 4Q12 highs. For 2013 as a whole, non-OPEC supply is expected to grow by 1.1 mb/d to 54.4 mb/d as South Sudan resumes exports and other disruptions abate.

OPEC crude oil supply turned lower in March in the wake of disruptions in Nigeria, Libya and Iraq and against a backdrop of seasonally weaker second-quarter refiner demand. Crude oil output was down 140 kb/d to 30.44 mb/d.

Refinery crude throughput will remain subdued in April, when spring maintenance is forecast to keep as much as 6.8 mb/d of capacity offline, including 5.6 mb/d in Europe, Asia, FSU and the Middle East. February runs exceeded expectations in Europe, however, pushing global throughput estimates to 74.9 mb/d.

OECD industry oil stocks decline by a seasonal 32.9 mb to stand at 2 664 mb by end-February. Stocks have been at a surplus to five-year average levels for six months. Product stocks led the draw, falling by 29 mb on reduced refining output, and by end-February covered 31.1 days of demand, 0.2 day less than a month earlier. I am maintaining my view of the entire complex at cautiously bearish bias as inventories are starting to build and moving the complex back into a supply driven mode rather than a demand led market. Brent has now breached its range support level again with WTI and refined products not faring any better. The complex is now suggesting that the next move is likely to be a continuation to the downside.

I am maintaining my view at neutral for Nat Gas. From a technical perspective the market is still in the breakout trading range of $4/$4.02 to $4.16/mmbtu and currently in the middle of the range. The failed attempt to get to the upper end resistance level earlier in the week and failure to solidly breach this level a few times along with a failure to breach the lower end yesterday suggests the market may be setting up to spend some time within the confines of the trading range.

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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