Crude Oil: Oil Prices Steady

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Monday Morning April 25, 2011

Quote of the Day
As I grow older, I pay less attention to what men say. I just watch what they do
Andrew Carnegie

Last week's gains in the oil complex were mostly about the falling US dollar coupled with positive fundamentals and geopolitical uncertainty in North Africa and the Middle East ( MENA ). Oil prices are once again approaching the highs made on April 11th and barring any sudden shifts in the main price drivers both WTI and Brent are likely to test the April 11 highs sometime this week. Many markets around the world are still closed today for the Easter holiday but those that open continued to show an appetite for risk asset classes including oil.

Although the US dollar has been receding and is now trading at levels not seen since August of 2008 it remains very oversold and susceptible to a short covering rally at anytime. If and when it comes it will likely result in a modest round of profit taking selling in the oil and commodity complex. The story has been all about the collapsing of the US dollar and that story will continue to play out this week as the US Federal Reserve's two day FOMC meeting gets underway tomorrow and will culminate with the first press conference by Fed Chairman Bernanke on Wednesday. The consensus is expecting the Fed to keep short term interest rates unchanged and at low levels for the foreseeable future with most expecting the Fed to fulfill all of QE2 but not likely embark on a QE3 program. At least based on Bernanke's comments from a few weeks ago he views the current inflation problem as transitory and likely to recede sometime this year. If that is still his and the rest of the FOMC group's view we can continue to expect the Fed to maintain an easy money policy at least through this year which will result in the US dollar declining even further from current levels and supporting a higher oil and commodity price environment throughout the year. Basis the way I see the US dollar trading for the rest of this year it certainly support oil prices continuing to trade in triple digits for 2011.

On the geopolitical front fighting continued to rage on in Libya with most of the fighting centered around the city of Misrata where both the opposition group and forces loyal to Gaddafi have dug in and claimed they have made progress over the weekend. It typifies why the civil war in Libya is likely to last for an extended period of time. It also seems that NATO is now also targeting Gaddafi as his compound was targeted in airstrikes earlier today and pretty much destroyed. His whereabouts were unknown and not likely to have been in the compound.

In other areas of MENA massive protests continued in Syria over the weekend with Syrian forces storming the city of Daraa against the protesters. Several of the protesters have been killed over the weekend as Syrian President Assad demonstrates the heavy handed dictator he is by killing his own citizens who are asking for more freedom. In Yemen the protests also continued as the populace not only wants Saleh to exit but they want him prosecuted. The opposition originally agreed to a peace plan on a deal brokered by the Gulf Cooperation Council ( GCC ) that calls for Saleh to leave in 30 days. The GCC plan would give him immunity which has now become an issue in Yemen. Overall the geopolitics of the region are going to continue to play a role in keeping the fear or risk premium on the price of oil for an extended period of time.

Risk asset markets were mostly higher last week with a few exceptions. Oil prices recovered some of the previous week's losses as the situation in Libya and the greater Middle East has not changed much and as a result the fear of other supply interruptions in the oil complex continued to cloud the market. In addition as discussed above the falling US dollar contributed to pushing prices higher. The oil risk premium expanded a bit last week for all of the reasons discussed in detail above. Financial markets were mostly higher on the week on strong corporate earnings from several bellwether companies. Equity markets continued their march to higher ground even as the macroeconomic data was mixed with the fear of inflation and short term interest rates starting to rise in the developed world providing a clear reminder to participants that conditions are changing and will eventually begin to impact corporate earnings down the road )not yet based on last week's round of earnings reports). Precious metals remained firm on the inflation risk fears.

Over the last week the oil complex increased across the board with the exception of HO which was unable to hold onto gains for the week. The spot WTI contract was the clear leader of the complex increasing more strongly than Brent based on the fear premium being stoked by a positive inventory report. WTI is now trading back above the $110/bbl level while the spot Brent contract increased back above the $123/bbl mark. The June Brent contract ended the week with a gain of 0.44% or $0.54/bbl. WTI surged above the $112/bbl mark increasing by $2.07/bbl or 1.88%. WTI gained ground versus Brent as PADD 2 and Cushing crude oil stocks decreased modestly this past week.

On the distillate fuel front the Nymex HO contract decreased modestly even though distillate fuel inventories declined for the week versus an expectation for a build. Spot Nymex HO decreased by 0.78% or $0.0250/gal. Gasoline prices experienced a modest gain on the week as gasoline stocks declined for the tenth week in a row versus an expectation for a small build. The spot Nymex gasoline price increased by 0.59% or $0.0194/gal this past week. However, the strong gain in WTI prices resulted in the 3-2-1 crack spread losing over 7% on the week.

Nat Gas continued to trek higher on the week. The spot Nymex NG price increased by 4.95% or $0.194/mmbtu on the week and is once again approaching the next technical resistance level of $4.50/mmbtu. Nymex futures prices have now been up for three days in a row as just about all of the shorts have been driven out of the market on what is viewed as an improving fundamental picture. As I have been indicating all week I think prices are ahead of the fundamentals as inventories are still above the normal five year average for the same week as discussed below.

The EIA Nat Gas inventory report was bullish with a net injection into inventory coming in below what the market was expecting with many actually expecting a net injection closer to 53 BCF this week. The weather was seasonable over a portion of the US with some colder than normal areas resulting in the report showing a disappointing injection for this time of the year. The injection was bullish when compared to the net injection for last year but neutral to even mildly bearish versus the five year average for the same week.

On the financial front equity markets around the world ended the week higher even as inflation fears ratcheted up a notch. Global equity values went back on the offensive as shown in the EMI Global Equity Index table below even as the macroeconomic data emerging from around the world was mixed for the global economy. The EMI Index gained 0.7% on the week after a strong loss the previous week. The EMI Index is now higher by 0.6% for the year with Brazil and Japan the main two bourses still in negative territory. China held its gains on the week as investor/traders are continuing to view China's inflation fighting efforts as something that may help not only stabilize this surging economy but keep it on track as a major player in global economic recovery. However, it was unable to hold the top spot in the winners column of the EMI Index with the US Dow now moving into the top spot. Last week the global equity markets were modestly positive for oil prices as well as the broader commodity complex.

The US dollar index was lower as the increase in short term interest rates by the European Central Bank continued to energize the dollar bears as the US Fed does not look like they will be changing their easy money policy anytime soon. The currency markets are still in the midst of a major realignment as I have been warning for weeks. Cash flowed strongly into gold (and the rest of the precious metals complex) which increased by 1.21% on the week.

With all of the concerns over the geopolitics of MENA I thought I would present a chart of a macro breakdown of US crude oil imports since 2000. As shown in the following chart the good news for the US is imports of crude oil from the region of the world...Persian Gulf... with the highest geopolitical risk has been decreasing steadily since 2000. Since peaking in 2001 US crude oil imports are down by about 35.5% through January of this year. On the other hand the US is still very dependent on total OPEC crude oil imports of which many of the countries that make up total OPEC are also countries with an above normal geopolitical risk. That all said the world is once again becoming tightly balanced as global demand continues to grow (global oil demand in 2001 is about 2.5 million barrels per day above 2008 latest EIA STEO report), outstripping supply (resulting in global inventories destocking) and demonstrating that is does not matter the source of oil for the US or any specific consuming country for that matter any shortfall or potential for a shortfall of supply is going to result in all oil prices surging higher as we have seen over the last three or four months.

My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my view at neutral and my bias at cautiously bullish as Brent and WTI are both trading well above the latest technical support level. The market is susceptible to a downside correction but I do not think it will happen in a major way today as many participants are still out of the office for the long holiday weekend.

I am maintaining both my Nat Gas view and bias at neutral with short term upside bias as prices are likely to remain mired in a range for the foreseeable future.

Currently asset classes are mostly higher as shown in the EMI Price Board table below.

Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

Referenced Stocks: GCC , MENA

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