As I warned in yesterday's newsletter the recovery in most risk asset markets has turned out to be a short covering rally in what is looking more and more like a broader based downturn. The oil complex continued to get pummeled with Brent now solidly below the $100/bbl level and the lowest price since the middle of last year. In fact Brent declined more than WTI on Wednesday resulting in the further narrowing of the Brent/WTI spread and now hovering near another key technical support level. The bearishness coming from the European sector and weighing on the Brent market is stronger than the fact that WTI crude oil has now built for the fourth week in a row. The Brent side of the spread is currently the dominant price driver.
The fallout in oil is continuing to being impacted by the growing view that there will be an issue with oil demand going forward. The fundamental data that has been hitting the media airwaves since the first half of last week have all pointed to a slowing of global oil demand growth. In addition the macroeconomic data that has been released since last week is suggesting that the global economy is showing more and more signs of a slowing. Along with the IMF lowering its forecast for global GDP growth all signs both fundamentally and based on economic data suggest oil demand growth is likely to continue in a slowing pattern for the foreseeable future. Simply put the forward oil complex is now facing a shortage of oil demand growth in the midst of a relatively robust supply market. At the moment oil is fundamentally and technically bearish.
Global equity markets have continued to lose values as shown in the EMI Global Equity Index table below. The Index is now lower by 2.7 percent for the week resulting in the year to date loss widening to 3.3 percent for 2013. There are now six bourses showing losses for the year to date with Japan and the US the only two bourses showing double digit gains for the year. In fact of the four bourses still in positive territory three of those bourse are countries that are living on aggressive accommodative monetary policies throughout the entire forward curve. Global equities are signaling and supporting the view that is coming from the macroeconomic data as well as the fundamentals that the global economy is slowing and thus a bearish signal for oil.
Today's EIA inventory report was mixed with a bias to the bearish side as total commercial stocks increased modestly on the week. Overall I would categorize the report as biased to the bearish side. Total commercial stocks increased by 2.9 million barrels even as crude oil inventories decreased modestly for the week. Refinery utilization rates decreased by 0.5 percent to 86.3 percent of capacity suggesting that scheduled spring maintenance may be lingering. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
Total commercial stocks of crude oil and refined products increased by 2.6 million barrels. The year over year surplus came in at 18.1 million barrels while the surplus versus the five year average for the same week widened to 50.8 million barrels. Crude oil inventories decreased (by 1.3 million barrels) versus a market expectation for a modest build in stocks.
Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. Even with the decrease in stocks this week the crude oil inventory status versus last year is showing a surplus of around 18.6 million barrels while the surplus versus the five year average for the same week came in around 35.1 million barrels. Crude oil imports decreased modestly on the week.
PADD 2 crude oil inventories increased modestly by about 0.8 million barrels while Cushing, Ok crude oil inventories increased by 1 million barrels on the week. PADD 2 crude oil stocks are still showing a surplus of 14.1 million barrels versus last year and 27.7 million barrels versus the five year average. The Cushing area surplus came in at 10 million barrels versus last year and 18.6 million barrels compared to the five year average.
There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to historically normal level of WTI trading at a premium over Brent. The increase in crude oil inventories in Cushing was bearish for the Brent/WTI spread but as discussed above the market focused more attention on the decline the robust supply situation in the North Sea as well as the faltering demand picture in Europe. There was a decrease in refinery utilization rates in PADD 2 for the fourth time out of the last four week (decrease of 1.9 percent) suggesting that the return from the spring maintenance season is slowing again and thus contributing to the crude oil inventory build in PADD 2 this week Distillate stocks increased by 2.4 million barrels versus an expectation for a smaller draw as refinery run rates decreased by 0.5 percent. Heating oil/diesel stocks increased modestly on a week over week even as the weather was still not very spring like.
The year over year deficit came in at 13.8 million barrels while the five year average deficit came in around 19.3 million barrels. Gasoline inventories decreased mostly within the market expectations. Total gasoline stocks decreased by about 0.7 million barrels on the week. The surplus versus last year came in around 7.8 million barrels while the surplus versus the five year average for the same week came in at about 6.3 million barrels. Gasoline stocks increased in PADD 1 stocks (US East Coast) by 0.7 million barrels this week with the surplus versus last year coming in around 5.3 million barrels with a 4.2 million barrel surplus compared to the five year average for the same week.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have presented a mixed categorization on the week for the complex. Overall this week's report was modestly bearish.
According to the latest from the EIA Weekly Petroleum report gasoline and diesel fuel prices declined for a 7th week. The U.S. average retail price of regular gasoline decreased seven cents from the previous week to $3.54 per gallon as of April 15, 2013, down 38 cents from last year at this time. Prices were lower in all regions of the nation, with the largest decrease in the Midwest, where the price fell 10 cents to $3.46 per gallon. The Gulf Coast price dropped seven cents to $3.36 per gallon, and the East Coast price is $3.53 per gallon, five cents lower than last week. The West Coast price declined four cents to $3.89 per gallon, but remains the highest in the nation. Rounding out the regions, the Rocky Mountain price is two cents lower than last week at $3.51 per gallon.
The national average diesel fuel price decreased four cents to $3.94 per gallon, 19 cents lower than last year at this time. Prices decreased in all regions of the nation, with the largest decrease on the West Coast, where the price decreased five cents to $4.07 per gallon. The Gulf Coast price dropped four cents to $3.85 per gallon. The East Coast and Midwest prices are both three cents lower than last week, at $3.98 per gallon and $3.92 per gallon, respectively. Rounding out the regions, the Rocky Mountain price fell two cents to $3.88 per gallon.
I am maintaining my view of the entire complex at a 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. In addition demand growth is starting to turn to the downside. 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 with a neutral bias as the spot Nymex contract is continuing to hover and trade either side of the $4.16/mmbtu level for the last several days. Markets are mostly lower ahead of the Asian trading session as shown in the following table.
Note: I am publishing Thursday morning's newsletter on Wednesday night due to my travel schedule. In addition I will be unable to publish Friday's report as I will in route to Europe.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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