Quote of the Day
Measure not the work until the days out and the labor's done.
Elizabeth Barrett Browning
The week is getting under way with a quiet start as Asia slowly begins to return from the lunar New Year celebrations and the protests in Egypt energy their fourteenth day...but with some progress. Brent crude oil is back over the $100/bbl mark after settling below $100/bbl on Friday while global equities are marginally positive (as measured by the Emi Global Equity Index) and the US Dollar Index is hovering near the unchanged mark...resulting in both equities and the dollar basically neutral for oil prices and the broader commodity markets as of this writing.
On the Egyptian front meeting have been going one with the various opposition parties all weekend and seemingly some progress has been made. However, the protests continue as the Egyptian people simply want Mubarak to leave. Some business and financial activity has opened and the signs are starting to indicate that stability is becoming more likely. I remain of the view that the Egyptian situation will not result in any disruption of oil supplies and Mubarak will leave gracefully with a transition government taking control until free, democratic elections can be held in the early fall. Also at the moment it does not appear that the Egyptian unrest is spreading to any of the key oil producing nations in the Middle East...like Saudi Arabia. Although that possibility continues to overhang the market and until participants are more certain that it will not happen anytime soon oil prices will continue to trade with a risk premium...especially the Brent crude oil contract.
In spite of the ongoing situation in Egypt by Friday the key energy markets pretty much returned back to about where they were a week ago. Investor/traders are slowly starting to believe that the likelihood of any interruption in the flow of oil through the Suez Canal or Sumed Pipeline was unlikely at this time. As shown in the EMI Weekly Price table below the results of last week's trading was mixed... a bit impacted by Egypt and a bit impacted by the macroeconomic data that hit the media airwaves. The elevated uncertainly level that had plagued investor/traders throughout 2010 continues to dominate the market sentiment as participants juggle the return of geopolitics as a market price driver on top of two different worlds insofar as the global economic recovery is concerned. The markets are continuously looking for any indications that will suggest how fast the economic recovery will proceed in the developed world and how slow the surging emerging market world will be impacted by the Central Banks inflation fighting policies in those regions.
Net result is most participants are continuing to focus their trading activity on a short time horizon with buy and hold trades still not back to pre recession levels. Overall most commodity based risk asset markets were mixed on the week with most global equities able to hold onto minor gains. Precious metals held higher and continued to be viewed as safe haven instruments during the current crisis. Over the last week the oil complex gave back most of the gains associated with the Egyptian unrest and fear of it impacting the flow of oil from the region. After surging well over the $100/bbl mark the spot Brent contract settled below $100/bbl and was only able to hold onto a minor gain of $0.41/bbl or 0.4%. On the other hand WTI settled below the $90/bbl mark and was negative territory for the week losing $0.31/bbl or 0.35%. WTI continues to depreciate versus Brent as inventories in PADD 2 and Cushing, Ok remain at record high levels with no end in sight.
On the distillate fuel front the Nymex HO contract increased marginally as colder than normal temperatures kept a lot of the bears at bay even with the Egyptian factor starting to lose its grip on the market sentiment. The benchmark Nymex HO contract increased by 0.84% or $0.0225/gal as total distillate inventories declined within the expectations this week. Once again thre was a healthy decline in heating oil stocks on the week while diesel fuel inventories continued to build. Gasoline prices lost ground as stocks have now built for the fifth week in a row resulting in the spot Nymex gasoline price decreasing by 2.04% or $0.0506/gal.
Nat Gas remained under pressure all week in spite of bitter cold temperatures and yet another bullish inventory report. On the week Nat Gas decreased by 0.3% or $0.013/mmbtu adding to the previous week's strong decline. As has been the case more often than not Nat Gas prices are trading in a tight trading range irrespective as to what has been going on with the weather around the country. The current weather has been very cold in major portions of the US even in far southern states resulting in outages in New Mexico and rolling power blackouts in parts of Texas. Nat Gas continues to be driven by the daily weather forecasts as well as the robust supply situation. There is still not much coming from the normal drivers of Nat Gas prices, like supply, inventories, weather, industrial consumption, etc. that is any different than it has been for months. In addition the international situation has also not changed all that much with the bulk of the LNG heading to both Europe and Asia with minimal impact on the US. The coal situation is still relatively tight even as the flooding problems have turned the corner in Australia but exports of coal are still below normal.
The latest six to ten day forecast is still showing large pockets of very cold weather over about 80% of the US lasting until the middle of February. The eight to fourteen day forecast is much milder than the shorter term projections previously mentioned in that colder than normal temperature are not projected to be as severe and only cover the very upper or northern part of the country. Based on the current forecast we can expect maybe two more weeks of above normal withdrawals from inventory with more normal withdrawals expected to return for the second half of February. With about 7 weeks left to the official winter heating season the return to milder winter weather and the fact that supply is still very robust significantly reduces investor/traders enthusiasm in buying the market in the short to medium term.
On the financial front equity markets around the world traded in a relatively tight trading range as most of Asia was closed to celebrate the lunar New Year and in spite of mostly constructive macroeconomic data coming from the developed world until Friday. There was a plethora of positive economic data that has emerged out of the US and Europe last week. Just about every piece of macroeconomic data coming from the US came in better than expected and suggestive of a more expansive economic recovery than expected. However, the major economic data point of the week was released on Friday by the US Department of Labor and simply put it turned out to be very disappointing. The latest non-farm payroll number came in at only 36,000 new jobs created for the month of January against a consensus forecast calling for a jobs gain of about 145,000 jobs. The headline unemployment rate was a bit better than expected dropping to 9% versus an expectation for an increase of 9.5%.
After Wednesday's better than expect ADP private jobs number along with Thursday's surprisingly larger than expected decline in the weekly initial jobless claims report many were optimistic that Friday's labor report would also come in better than forecast. The payroll number was likely hit by bad weather in January, when storms forced people to stay home. Also the ECB ended their monthly last week with the Central Bank leaving interest rates at 1% as expected while Trichet suggested inflation pressures are likely to abate by the end of the year and thus indicative that the ECB may not be ready to raise interest rates in the short to even medium term. So overall the data was disappointing but still suggestive that the US economy is likely to continue to only grow in a slow and grow pattern and a sudden surge in the economic recovery is unlikely. As such any sudden surge in consumption of oil is also very unlikely anytime soon.
As shown in the EMI Global Equity Index table below the EMI Index increased by just 0.1% on the week resulting in the EMI Index still remaining in a loss position of 0.7% for the year 2011. Two of the ten bourses that make up the Index remain negative territory for the year...Brazil and China. Last week the global equity markets were neutral for oil prices as well as the broader commodity complex.
The US dollar index as well as the euro and yen were all marginally lower on the week. The US Dollar Index lost 0.13% on the week while the euro declined by 0.22%. Much like equities the direction of currency markets was a neutral for oil price as well as the broader commodity complex last week. The global currency markets continue to be in a broad trading range which is likely to continue in the short term. Cash continued to flow into gold which increased by 0.57% on the week.
This week the oil markets will have to interpret and digest not only the recurring weekly inventory reports on Tuesday afternoon and Wednesday morning but also the three main oil fundamental forecasts will be released. The EIA will release their Short Term Energy Outlook on Tuesday while both the IEA and OPEC will publish their monthly oil assessments on Thursday. As has been the case for months the markets will be focused on each of the reports forecast of global oil demand especially with many countries in the emerging markets in the midst of intentionally slowing their economies as they fight inflation risk. I am expecting al three of the forecast reports to keep their forward oil consumptions relatively steady versus last month's report. As such I expect this month's round of reports to be neutral and have only a minimal impact on short term oil trading.
My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my overall view and bias at neutral for oil as the market is continuing to trade around the evolving situation in the Middle East. Absent Egypt oil prices are likely to experience a further downside correction as they did on Friday. That said the oil complex is still clearly in a technical and fundamentally driven longer term uptrend but the market is susceptible for a downward correction in prices.
I am maintaining my Nat Gas view and bias at neutral as the market continues to struggle to hold onto any major gains and seems destined to actually now test the lower end of the trading range. With supply still very robust even the advent of another round of colder than normal winter weather conditions may not seem to be enough to send prices into surge mode rather I am still expecting to see prices remaining in the trading range they have been for months for the foreseeable future. Weather is still the main driver of price direction but the oversupply situation continues to dampen any upside enthusiasm that may come from above normal heating fuel demand.
Currently most markets are firmer as shown in the EMI Price Board table below.
Dominick A. Chirichella
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