Crude oil prices finally breached the upper end of the trading range for the spot WTI contract with Brent lagging behind. The main oil price driver in the very short term remains driven by the 30 second news snippets on the negotiations for a US budget and thus an avoidance of the so called fiscal cliff. Negotiations are progressing as both sides met yesterday afternoon suggesting to me that they are getting closer to deal. In fact an aide for Republican House Speaker Boehner said Obama offered a higher threshold for tax rate increases which the aide said was a step in the right direction. Both sides have been keeping their cards close to their vest as they both try to get as much out of the deal for their respective sides as possible.
Now that the time is getting short the compromise movements are starting to emerge as we saw yesterday with the President's move to a threshold of $400,000 from his original level of $250,000 to trigger tax rate increases. They are also said to have agreed to at least $1 trillion in spending cuts and at least $1 trillion in new revenue through a mix of tax rate increases on top incomes and tax code reform... through the details are still being discussed.
At this stage of the negotiations and with less than two weeks left before the fiscal cliff would trigger I am even more certain that a deal will be done... even possibly before the end of the week. The odds continue to favor a deal as the consequences of no deal are far greater to both sides (another likely US recession) than making some compromises on their original positions.
Today's move higher in oil and most other risk asset markets are mostly being driven by the probability increasing of a deal getting done. There is not much other than the US budget deal that can impact the direction of oil and most risk asset market this week. The economic calendar is light and as the week progresses many traders and investors will be heading to the sidelines ahead of the upcoming holiday week. Liquidity will drop to below normal levels by the end of the week and remain like that for the rest of the year.
Another contribution to the narrowing of the Brent/ WTI spread over the last twenty four hours was yesterday's announcement that the Seaway pipeline will reach its next plateau of about 400,000 bpd by early January. The pipeline is currently exporting about 135,000 barrels per day of crude oil from Cushing to Freeport, Texas and will now more than double. This is another step (with more to come) in the long overdue normalization process of the Brent/WTI spread. Even with the increase of the Seaway pipeline capacity other steps will be needed to move even more oil out of the Cushing/PADD 2 area of the US to reduce the surplus that has been plaguing this spread for several years. The pipeline expansion will also further reduce imports of foreign crudes as the US slowly moves closer toward energy independence.
In Asia China set it GPD target for 2013 at 7.5% for the second year in a row while tightening its inflation objective at the lowest level since 2010. They are targeting an inflation rate of just 3.5%. As I detailed in yesterday's newsletter China is approaching their growth objectives for 2013 with more tolerance of a slower rate of growth but with higher quality and thus longer lasting growth. The aforementioned targets are very consistent with such an approach.
Global equities are in positive territory for the week as shown in the EMI Global Equity Index table below. The Index gained about 0.13% over the last twenty four hours with the US and Japan showing the largest gains for the week... so far. In the US it is driven by the potential for a fiscal cliff deal while in Japan it is being driven by the election of the party that ran on more quantitative easing and stimulus to get the Japanese economy growing. The year to date gain for the EMI Index has widened to 9.9% or the highest level since early April of this year. Global equities have been a positive price driver for the oil markets as well as the broader commodity complex.
The weekly oil inventory cycle will follow its normal schedule this week. The weekly oil inventory cycle will begin with the release of the API inventory report on Tuesday afternoon and with the more widely followed EIA oil inventory report being released Wednesday morning at 10:30 AM EST. With geopolitics less of an issue or price driver than it was the last month or so the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest draw in crude oil inventories, a build in gasoline and in distillate fuel stocks as the weather was mostly warmer than normal over the east coast during the report period. I am expecting crude oil stocks to decrease by about 0.9 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 37.6 million barrels while the overhang versus the five year average for the same week will come in around 45.6 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is still pumping and refinery maintenance programs in the region are mostly over. This will be bearish for the Brent/WTI spread in the short term as the spread is currently trading at a relatively high premium to Brent and very near the highs recently hit. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Jan Brent/WTI spread still trading around the $20/bbl level as of this writing. The narrowing of the spread should begin to ease once the North Sea returns to a more normal production level, the situation in the Middle East quiets down and the expanded capacity of the Seaway pipeline starts flowing in January.
With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.5 million barrels which would result in the gasoline year over year deficit coming in around 0.2 million barrels while the surplus versus the five year average for the same week will come in around 6.6 million barrels.
Distillate fuel is projected to increase by 1.1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 22.3 million barrels below last year while the deficit versus the five year average will come in around 26.9 million barrels.
The following table compares my projections for this week's report (for the categories I am making projections with the change in inventories for the same period last year. As you can see from the table last year's inventories are mostly in directional sync with this week's projections. As such if the actual data is in line with the projections there will be only small changes in the year over year inventory comparisons for just about everything in the complex.
I am maintaining my view and bias at neutral as the current fundamentals are still biased to the bearish but the forward view of 2013 fundamentals are starting to look more supportive. In addition the technicals are indicating that the selling momentum has eased as the market is now in a short term and narrow trading range.
There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil. But as discussed above the market seems to be paying less attention to the nearby fundamentals. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is still positioned to test the lower end of the trading range... especially after this week's bearish inventory snapshot. 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 in the early stages of the winter heating season and currently those forecasts are all still mostly bearish.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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