The latest macroeconomic data out of China overnight shows that the main economic growth engine of the world is still growing but not at the pace many expected it would be growing by now. China's industrial production increased by 9.9% in the first two months of 2013 but it is the weakest start to a year since 2009. Retail sales increased by 12.3% but it was below the market consensus of around 13.8%. The new leadership now takes the reins with growth showing signs of slowing while inflation pressures are starting to build. As I have been indicating the pace of growth of the Chinese economy is not going to result in a growth spurt in oil consumption over and above what has already been projected anytime soon.
This week the three main reporting agencies (IEA,EIA and OPEC) will all release their monthly forecasts for 2013 and beyond. OPEC and the EIA will release their reports on Tuesday while the IEA report will hit the media airwaves on Wednesday morning. Last month the most notable outcome was the 90,000 bpd reduction in the IEA's global oil consumption projection for 2013. This round I expect all three agencies will keep their forecast in line with last month's forecast as there are no signs that the global economic growth pace has changed much since last month.
On Friday the US jobs outlook came in much better than most investors and traders were expecting. The US nonfarm payroll data was a huge miss to the upside showing the creation of 236,000 new jobs with the unemployment rate declining to 7.7 percent. This is a huge positive for the US economy and one that shows that the economy is still growing and not following the sluggishness seen in Europe.
With the unemployment situation taking on an elevated level of importance in the US Central Bank's policy making Friday's data has raised the question (as expected) as to the Fed's exit strategy... has it changed. I do not think so and I expect the Fed to continue under its current plan of a very easy monetary policy as long as the unemployment rate remains above 6.5 percent and inflation is below 2 percent. Currently we are not near either of these thresholds.
Gasoline prices have been rising strongly over the last week or so but not due to the normal reasons of higher crude oil prices of geopolitics. Prices are rising as refiners are caught in a dilemma as to the use of ethanol. With gasoline demand steadily declining for the last four or five years and with the government mandate for using ethanol as a blend stock in gasoline increasing the industry is at the point where they can't add enough ethanol to meet the government mandate or else they would begin to violate car makers warranties regarding the maximum amount of ethanol in gasoline.
If refiners do not blend in the mandate amount of ethanol they must purchase renewable fuel credits... known as Renewable Identification Numbers or RINS. RINS prices have been spiking as the demand for them is rising due to the aforementioned blending problems. RINS have tripled in the last three weeks from $0.2750/gallon to $0.83/gallon (according to a Reuters article). In the last three trading session the spot Nymex RBOB gasoline contract has risen by around $0.12/gallon while the spot WTI contract is only marginally higher and Brent is down by about $1/bbl. There is no shortage of gasoline, there is no surge in international crude oil prices nor is there a shortage of crude oil any place in the world. Unfortunately the US consume may likely see prices at the pump moving back to an upward trend after leveling off for a few weeks.
The oil complex ended the higher across the board for the first time in three weeks. The spot RBOB contract led the market higher as discussed above with Brent the laggard in the group as North Sea crude oil production returns to normal levels.
WTI increased more than Brent narrowing the April Brent/WTI spread modestly this week. The spot WTI contract increased by 1.4 percent or $1.27/bbl while Brent gained about 0.41 percent or $0.45/bbl. Crude oil stocks in PADD 2 declined while Cushing gained marginally.
The April Brent/WTI spread was lower for the fourth week in row. The April spread declined by 4.16 percent or $0.82/bbl. It is now trading below the trading range it has been in since early February. At the moment the spread is approaching another key technical support level of around $18.25/bbl and if breached it could be heading back to the $17/bbl area a level the spread was trading at just prior to the announcement of the Seaway pipeline bottleneck issues.
With North Sea production levels running around normal and with no major disruptions in international crude oil supply the Brent/WTI spread is likely to be impacted more by US based price drivers rather than the Brent side over the next several weeks. With the US spring maintenance season getting underway crude oil demand in the mid-west is going to decline which could increase the surplus of crude once again in PADD2 and Cushing and thus be a temporary fundamental support for the spread.
On the distillate fuel front the Nymex April HO contract increased by 1.53 percent or $0.0448/gal on the week as distillate fuel inventories decreased strongly as temperatures were below normal over parts of the US during the report period. Distillate was the largest percentage loser in the oil complex for the second week in a row. Gasoline prices increased modestly even with a surprise build draw in inventories last week. The April Nymex gasoline price increased by 2.39 percent or $0.0802/gal this past week.
The April Nat Gas futures contract increased modestly by 5 percent or $0.173/mmbtu on the week and is now in the $3.50 to $3.66/mmbtu trading range. The market has finally breached the $3.50/mmbtu after trying three times last week to breach the $3.50/mmbtu resistance area and failing.
The post EIA inventory rally continued as the spot Nat Gas futures contract has remained above the key $3.50/mmbtu level for the second day in a row. On the premise that the market settles above the new support level of $3.50/mmbtu we may see another new leg to the upside in the short term. Again I will caution the futures market has struggled to remain above the $3.50/mmbtu since early November of last year having failed each time it has moved above it.
The latest NOAA weather forecast is still supportive but as the forecast moves deeper into March the support is beginning to show signs of wavering as the area of the US expecting colder than normal temperatures is getting smaller and thus Nat Gas related demand for heating is going to slowly start to return to normal levels. With normal quickly moving toward "spring like normal" Nat Gas demand is going to decline. As it does inventory withdrawals will also quickly decline and start the switch over into the injection season as the shoulder season takes hold.
Historically (basis the five year average and last year) the injection season tends to begin in the middle to the end of March (depending on how quickly winter moves out) or around the start of spring. With the current weather forecast starting to moderate and with the Nat Gas futures forward curve in a modest contango starting with the spot contract the market will begin to inject gas into inventory as soon as possible (basis winter demand diminishing). Thus there is max only about three more inventory reports that may show net withdrawals but with each withdrawal likely below the previous one as winter like weather diminishes.
In addition coal prices are trading at a three week low while Nat Gas futures are at a six week high. Coal to Nat Gas switching definitely continues to economically favor coal (has been the case since fourth quarter of last year). Not only will there not be much of any additional Nat Gas demand to replace coal for power generation it will continue to move in the opposite direction with less gas and more coal usage for power generation. Nat Gas demand to offset coal related power generation will be well below last year's levels and more in line with levels seen several years ago. Obviously this is a negative for the Nat Gas market as supply is more likely to outstrip demand and thus ultimately have a negative impact on prices in the medium term.
As it looks right now if the rest of the month performed like the five year average end of season inventories would come in around the 2 TCF mark. If the cold persists it could end closer to the 1.9 TCF level. In either case it would still be above the five year average but below last year. The injection season will start with more gas in storage than the normal five year average starting level increasing the possibility of inventories hitting near record high levels prior to the start of the next winter cycle.
On the financial front equity markets around the world surged higher with both the US and Europe hitting all time record high levels. The EMI Global Equity Index is now showing a year to date gain of 2.2 percent. Global equity markets have been on the defensive since peaking at the end of January and at least for the moment it seems the downward correction may be over. Equities were a positive price driver for the oil complex last week.
The euro was lower on the week while the US dollar was higher driven mostly by the ECB keeping rates unchanged while the US continues to move forward with its QE program. Last week the global equity markets were a supportive price driver for oil and most commodity markets.
I am maintaining my view of the entire complex at neutral as the oil complex appears to still be in the process of forming a short term technical bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.
I am adjusting my view to cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.
Markets are mixed 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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