The fiscal cliff rally in oil prices is starting to wind down
as the market (and I) do not see much of a connect between a very
imperfect fiscal cliff deal and US oil demand. The US has a long
way to go before all of the major debt, deficit and spending
issues are resolved with many battles between the very partisan
US political atmosphere yet to come. As I said yesterday the tax
side of the equation is solved and has removed a level of
uncertaintity and will move into the background over the next day
or so. However, the bigger issue facing the longer term growth of
the US economy is the voracious appetite for government spending.
The runaway government spending has to be capped or else the US
economy will be stagnant for years to come.
The next major battle will be waged in the next two months and as
such it will impact the short term movement of the global risk
asset markets as a new round of 30 second news snippets over the
US debt ceiling and deficit hit the media airwaves. Throughout
the first quarter of 2013 equity and commodity volatility will
likely be above normal as the Washington politicians move to the
second act of their comedy of errors play.
In the short term today starts the ever important jobs data cycle
in the US as well as the weekly inventory snapshot cycle. This
morning the first part of the US jobs assessment will begin with
the release of the ADP private sector forecast, the Challenger
job cuts report along with the weekly initial jobless claims
report. Tomorrow morning the monthly nonfarm payroll data and
headline unemployment rate will be released. Currently the market
is expecting about 160,000 new jobs in Friday's report with the
unemployment rate holding at 7.7%. If the data is in sync with
the projections it will be a neutral data point for the US
economy and one that suggests the US economy is still not
creating enough jobs.
The global equity markets have benefited by the combination of a
short covering rally due to the US fiscal cliff deal and a modest
level of risk on trading taking place over the last forty eight
hours. After increasing by 11.5% for 2012 the EMI Global Equity
Index (table shown below) is starting 2013 with a 2.2% gain.
Although it is very early in the year the US is not in the top
spot (as has been the case throughout 2012) with Hong Kong and
Brazil holding the top for the moment. I view the gains in Hong
Kong and Germany and a few other places as a continuation of the
rally in equities in those areas that has been in play since the
second half of 2012. At least for the moment the global equity
markets continue to be supportive for oil prices as well as the
broader commodity complex.
So far the Feb Brent/WTI spread is not reacting very strongly to
the start of the new expanded capacity of the Seaway Pipeline.
The spread has been relatively flat for the last two trading
sessions even as the final work is being performed on the line
with the capacity scheduled to begin pumping at a rate of 400,000
bpd by the end of next week. The line has been running at a
nominal rate of about 150,000 bpd since the line was reversed.
Crude oil inventories in Cushing, Ok are still at the highest
level since the EIA began to report Cushing data back in 2004
while PADD 2 crude oil stocks are at the highest level since EIA
began reporting data back in 1990.
Needless to say there is still a huge surplus of crude oil in
this region. Yes the expansion of the Seaway pipeline will help
to move some of the surplus crude oil to the Gulf Coast. However,
the surplus is going to linger in this area well into the future
as crude oil production feeding this area of the US is also
continuing to rise. I do not see the spread narrowing
significantly during the first half of 2013... possibly later in
the year it could move back down to the $11 - 13/bbl (premium to
Brent) range that was tested back in the middle of September of
2012 if in fact inventories in the region do enter into a
sustained destocking pattern. For interest PADD 2 crude oil
stocks were about 10 million barrels lower than where they are at
the moment when the spread last tested the aforementioned lower
This week the EIA will release its weekly oil inventory snapshot
one day late on Friday, Jan 4th at 11 AM EST due to the New Years
Day holiday on Tuesday. The API inventory report will also be
released one day late on Thursday afternoon, Jan 3rd. 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 even as the weather was winter like over the east coast
during the report period. I am expecting crude oil stocks to
decrease by about 0.7 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 42.9 million barrels while
the overhang versus the five year average for the same week will
come in around 50.2 million barrels.
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 surplus coming in around 6.9 million
barrels while the surplus versus the five year average for the
same week will come in around 11.7 million barrels.
Distillate fuel is projected to increase by 1.0 million barrels.
If the actual EIA data is in sync with my distillate fuel
projection inventories versus last year will likely now be about
20 million barrels below last year while the deficit versus the
five year average will come in around 24.4 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 not in directional
sync with this week's projections. As such if the actual data is
in line with the projections there will be modest changes in the
year over year inventory comparisons for just about everything in
I am maintaining my view at neutral and my bias at cautiously
bullish 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 has now
moved into a higher level trading range over the last two days.
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 downgrading my Nat Gas view to cautiously bearish as the
fundamentals and technicals are now suggesting that the market
may be heading lower for the short term. I anticipate that the
market is now positioned to possibly test the $3/mmbtu support
level if the actual temperatures are in sync with the latest NOAA
forecasts. 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 heart of the
winter heating season and currently those forecasts are bearish.
Markets are mostly lower heading into the US trading session as
shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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