What difference a few days make in the world of oil especially when the pricing action is coupled with a bullish oil inventory report that the market actually paid attention to in formulating the next price move. So far this week the macroeconomic data has been somewhat positive and certainly not as negative as it has been over the last month or so. That said the week is not over and there are still market moving data and actions yet to be announced. The European Central Bank is meeting today and is expected to possibly announce a cut in short term interest rates to stimulate the sluggish EU economy while the market awaits tomorrow's US jobs data report. In addition the EU head proposed a coordinated action to recapitalize European banks. In a bit of a positive for markets the Bank of England just announced they were increasing their bind buying program or quantitative easing to add further stimulus to the sluggish UK economy.
All of the above has catapulted oil prices from year to date lows made on Tuesday to back above the $80/bbl for WTI and solidly above $100/bbl for Brent. At the moment I would categorize oil as being out of a short term bearish move and now neutral to biased to the upside. That said the actions of the ECB as well as the outcome of the macroeconomic data over the next several days will have a strong say as to whether or not WTI and Brent are able to remain above their newly anointed support levels. If the ECB makes a bold move and lowers interest rates significantly today ( I think it will a modest 0.25%) the euro will weaken and the US dollar will likely strengthen which would be a negative for oil prices. Also if tomorrow's US jobs report comes in much worst than expected it will result in strong selling hitting the equity markets which would also be a negative for oil prices. So as much as I am now viewing oil with a bias to the upside any oil trading should continue to be done with a very short term time horizon and with the use of tight, trailing stops as all of the risk asset classes are very susceptible to price reversals and significant movement from the 30 second news snippets ...especially around Europe that are bound to hit the media airwaves over the next several sessions.
The short covering rally that has hit most risk asset markets has carried through to most of the global equity markets as shown in the EMI Global Equity Index table below. All of the EMI bourses gained ground over the last twenty four hours other than China which has been closed all week for holidays. The Index has gained about 1.9% overnight but still remains 1% off on the week and below the bear market threshold for the year to date with a loss of 21.3%. The global equity markets have a long way to go before one can safely say that the trend has changed. For the moment the underlying trend for equities is still bearish and lower and everything we have seen so far over the last few days can only be categorized as a short covering rally. Nine of the ten bourses in the Index continue to show double digit loss for the year with the US Dow still leading the pack as the best of the worst.
For the very short term equities have been supportive for oil prices. When viewing the longer, underlying trend the global equity markets are still trading on the basis of further contraction to the global economies and thus a negative driver for oil prices. Of interest over the last several days trading of the two main external drivers of oil prices...the USD and equities... the US dollar has played a more dominant role with oil prices moving almost tick for tick with the US dollar with the correlation versus equities is still high but not as dominant.
For the first time in weeks the outcome of the EIA oil inventory report did matter for the short term direction of oil prices as yesterday's weekly EIA inventories showed a surprise across the board draw in stocks and biased to the bullish side. The bullishness spread across the entire report with the biggest decline coming from crude oil as imports declined sharply on the week. The largest draw in crude oil came from PADD 3 or the Gulf region mostly impacted by an over 1 million barrel per day decline in imports. Beyond that gasoline inventories declined modestly on the week as implied demand held steady and US refiners seemingly started to switch to a more max distillate production mode (at the expense of gasoline). With this week's decrease of 4.6 million barrels total commercial stocks in the US have still grown by almost 48.5 million barrels over the last few months.
The market viewed the report as bullish right from the moment the report was released and into this morning so far. Also for the first time in awhile the API report (released late Tuesday night) turned out to be in directional sync with the EIA report as some of the market participants actually started entering bullish oriented trades from the moment the API data was released. The inventory report showed a modest decrease in total stocks, and unexpected decline in gasoline and distillate inventories along with a modest draw in crude oil stocks as implied demand increased marginally and refinery utilization rates decreased only slightly on the week to 87.7% of capacity a decrease of 0.1% in refinery run rates. 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 decreased on the week by 4.6 million barrels. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 28th week in a row. The year over year deficit widened to 64.3 million barrels while the overhang versus the five year average for the same week narrowed to 9.9 million barrels.
Crude oil inventories decreased versus an expectation for a modest build. With a decrease in stocks this week the crude oil inventory status versus last year is showing a wider deficit of around 24.7 million barrels while the surplus versus the five year average for the same week declined to around 6 million barrels. PADD 2 stocks decreased modestly by 0.5 million barrels while Cushing stocks declined by about 0.8 million barrels. Crude oil inventories in this region of the US have been in a decline and are now at levels not seen since the middle of 2010 when the Brent/WTI spread was trading at significantly lower levels. That said the spread has been under selling pressure for most of this week with selling continuing into this morning. Further contributing to the retracement in the spread is a growing view that Libyan oil will begin to flow more steadily sooner than later and some of the earlier thinking that there was heavy damage to the oil fields may not be the case as industry experts begin to tour the facilities.
Crude oil inventories have been declining steadily since peaking back in early spring. In fact PADD 2 crude oil stocks are about where they were in the middle of last year as shown in the following chart below. Back then the Brent/WTI spread was trading in a range of $0 to $2/bbl premium to Brent. With the Brent/WTI spread trading at around $22.50/bbl we could then conclude that the last $20/bbl or so is still a risk premium on Brent associated with the loss of Libyan oil, underperformance of the North Sea and force majeure in Nigeria. The spread is certainly not being driven by PADD 2 crude oil stocks rather it is being driven by the current loss of supply from the aforementioned producing areas with an expectation that those losses will continue for the foreseeable future. That said I consider Brent to be significantly overvalued versus WTI and I expect the spread to continue to slowly retrace as more and more oil flows from Libya.
Distillate stocks decreased versus an expectation for a small build. Heating oil/diesel stocks decreased by 0.7 million barrels as exports remain robust on the week. The year over year deficit narrowed to 15.5 million barrels while the five year average overhang narrowed slightly to 6.5 million barrels.
Gasoline inventories decreased modestly on the week versus an expectation for a build in stocks. Total gasoline stocks decreased by about 1.1 million barrels on the week versus an expectation for a build of about 0.8 million barrels. The deficit versus last year narrowed to 6.2 million barrels while the surplus versus the five year average for the same week narrowed to 4.8 million barrels.
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 with crude oil, gasoline and distillate as bullish while jet fuel was mostly neutral to bearish. The fact that crude oil imports decreased strong on the week was the main reason why there was such a large decline in crude oil inventories this week. This is likely a one week phenomenon and I would expect to see a big jump in imports next week with a corresponding build in inventories.
With WTI now trading above the $80/bbl level I have to change my bias to the bullish side with a big caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data due out today and tomorrow are negative or if any of the 30 second news snippets are bearish. If WTI drops solidly back below the $80/bbl level my bias would quickly be downgraded as well.
With the short term weather forecast a neutral at best and with a forecast for yet another bearish EIA inventory report I have to keep my drivers at bearish. I know it sounds somewhat boring but it is very difficult to find something overly interesting to suggest the next price direction for Nat Gas for the short term...other than most likely lower. The only potential price driver will be today's weekly EIA inventory injection report assuming the actual data is out of the range of the projections. In fact the spot Nymex contract is now well below it current support level with nothing in between the current price and the next support level of around $3.40/mmbtu.
Currently as a new day of trading gets underway in the US markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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