The battle between a weakening fundamental picture for the oil complex against the very aggressive easy monetary policy in the US, Japan, UK , Europe and even India are creating a choppy and volatile short term trading pattern. Yesterday's rally in the oil complex was actually led by WTI even after the EIA reported a surge in crude oil inventories pushing the total level to an eighty two year high. Certainly Thursday's move was all about the massive amount of liquidity that is hitting the market by the aforementioned Central Banks offsetting the slowing oil demand growth scenario… at least for the moment.
The oil complex has been trading in a higher trading range for the last eight sessions after bottoming in mid-April driven by the weak oil demand growth view. However, the market is struggling to get through the upper range resistance area and move on to the next higher level. So far all of the commodities in the oil complex have made at least four attempts to breach their respective resistance levels and all four time they have failed. Once again after yesterday's surprise move to the upside the complex seems poised for yet another test of breaching resistance. I view yesterday's move more as a bit of QE euphoria rather than any structural change in the overall bearish fundamental picture.
From a trading perspective the market is likely to remain in the choppy pattern at least until this morning's (8:30 am EST) US nonfarm payroll data is released and digested (market is expecting about 160,000 new jobs with the unemployment rate remaining steady at 7.6 percent). A better than expected report could turn out to be mildly negative for the oil complex as market participants might interpret the data as an early warning sign that the US Central Bank may begin to develop an exit plan for their massive QE program sooner than originally expected. On the other hand another negative report like last month's underperformance would certainly be supportive as it would suggest that the Fed will continue to print money for the foreseeable future.
There is no hiding from the fact that the global economy is slowing… more quickly in some areas of the world and the main remedy that is being employed is a very easy monetary policy as we have seen over the last several years. Except now it is continuing to spread. Yesterday the ECB finally admitted that the EU economy is going nowhere quick as they lowered short term interest rates by 25 basis points and approaching the US policy of near zero interest rates. This morning the European Commission painted a negative picture for the EU economy in their latest forecast. They said the economy would contract more than originally expected while also pushing unemployment to a new all-time record high. They forecast that GDP would decline by 0.4 percent for 2013 versus the last forecast predicting a 0.3 percent contraction.
Also overnight another emerging market country is concerned about their sluggish growth… India. The Central Bank in India lowered short term interest rates for the third month in a row. The Indian economy is slowing along with its main Asian competitor… China based on the plethora of macroeconomic data that has been released over the last several months. Although the global economy is not anywhere near what it was like at the height of the recession the economy is still slowing and various forms of easy monetary policy are once again taking over the controls. Thus establishing the so called floor in most risk asset markets… including oil prices. The battles continues in the oil complex.
Global equity markets are poised to end the week with a gain as shown in the EMI Global Equity Index table below. The Index did lose about 0.3 percent over the last twenty four hours but it is still showing a weekly gain of 1.1 percent with the West still trading. The Index remains in positive territory for 2013 showing a gain of 0.6 percent with seven of the ten bourses in positive territory for the year to date. The rankings remain the same with the largest gains in countries that have the most aggressive and easy monetary policies. Equity prices have been a supportive price driver for the oil complex as well as the broader commodity markets this week.
The Brent/WTI spread is starting to show the early signs of forming a short term technical bottom as it has been relatively flat over the last three or four trading sessions as it hovers either side of the $9/bbl level (premium to the Brent). The spread has narrowed tremendously over the last several months being driven by an improving inventory situation in the US Midwest along with normal to above normal production levels out of the North Sea coupled with a weak demand period for crude oil for Europe. The spread remains in a trading range of $8.25/bbl on the support side with around the $10 to $10.50/bbl on the resistance side.
I still view the spread as in a longer term movement toward more normal, historical trading levels over time. However, we may be coming close to a short term turning point as some maintenance in the North Sea will slow production from current levels… like in the Ekofisk field. As such we could see a round of short covering emerging which could in turn send the spread higher for a test of the upper range resistance before making any further narrowing progress. If you are short the spread time to tighten up you stops.
I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range support levels suggesting further downside potential in the short term.
I am maintaining my view at neutral for Nat Gas and moving my bias to cautiously bearish as today's price reversal and breaching of the lower range support level suggests lower prices may still be in the cards. The fundamentals are less supportive after today's inventory snapshot.
Yesterday's EIA Nat Gas report was bearish versus the market consensus and mixed versus the historical data… bearish compared to last year and mildly bullish versus the five year average. The report showed a net injection that was only marginally below the market expectations greater than last year but less than the five year average net injection for the same period. The 43 BCF injection (a little less than normal for this time of the year) was modestly above the market consensus calling for an injection of around 28 BCF. The build of 43 BCF was above my model forecast (30 BCF injection) this week. The year over year inventory situation remains in a strong deficit position versus last year but has narrowed this week while the deficit versus the more normal five year average has widened. The current inventory deficit came in at 118 BCF versus the normal five year average or about a negative 6.2 percent.
Markets are mostly higher ahead of the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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