Yesterday's activity in the oil complex was all about the
growing concern over the evolving situation between Israel and
Hamas. The market has not overreacted to the situation as there
is no shortage of oil anyplace in the world and the area of the
Middle East under question is not the oil producing region of the
Middle East. Thus at the moment there is no imminent threat for
an interruption in the supply of oil. The market has built about
a $3 to $5/bbl risk premium into the price of oil since the
fighting began last week. That said there seems to be a effort
underway from the international community... including the US to
work a cease fire out. Secretary of State Clinton is on her way
to the region to meet with the various players in the conflict as
well as some of those trying to broker a deal between both sides.
Today Israel postponed a decision to launch a ground offensive
into the Gaza Strip to give international negotiators a chance to
put together a cease fire. The Israeli Prime Minister said he
prefers a diplomatic solution. I believe with all of the effort
currently taking place from the UN, US, European and Middle
Eastern diplomats the likelihood of some sort of a cease fire and
subsequent negotiated solution is increasing. So far in overnight
oil trading the price of both Brent and WTI have stop rising and
have in fact eased marginally as some market participants are
starting to view a diplomatic solution may be possible in the
short term. If it is accomplished the price of oil will likely
fall quickly and pretty strongly shedding a major portion of the
risk premium built into the price over the last week or so.
Absent the geopolitical risk of the current Middle East flare-up
most all of the other normal oil price drivers are biased to the
bearish side. The current fundamentals are well supplied while
the global economy is continuing to falter with no signs that a
reversal is imminent. As I detailed in yesterday's newsletter the
short term direction of oil prices is primarily being driven by
geopolitics and will be under that influence (in either
direction) for the short term.
In Europe the EU Finance Ministers are meeting once again to
discuss Greece's financial situation in Brussels. The Ministers
will also be discussing Spain. The market is looking for any
signs that the EU will be able to solve this four year old
problem once and for all. The issue on Greece is trying to find a
way to discuss a $19 billion dollar gap in Greece's public
accounts. Last week EU leaders granted Greece two more years to
cut its budget deficit. Greece and the rest of the EU nations
engulfed with sovereign debt problems has been lingering issue
for years and is likely to be a cloud over the EU economy for the
foreseeable future. The EU is now officially in a recession and
will likely remain in that state for several quarters to come.
Thus oil demand will likely continue to also falter from this
region.
In Asia just a reminder that the so call main global economic
growth engine...China is also still struggling... direct foreign
investment in China declined 0.2% in October compared to a year
earlier for the 11th decline in the last 12 months. The Chinese
economy is only slowly growing as its two main export regions of
the world... Europe and the US are also struggling economically.
Global equities rebounded about 1% over the last twenty four
hours as shown in the EMI Global Equity Index table below. The
Index has now recovered all of last week's losses primarily on a
strong short covering rally in the US, Canada and Brazil. The
year to data gain for the Index widened to 4.3% with only two
bourses still in negative territory for the year... China and
Brazil. The German bourse is now back to showing a gain of over
20% for 2012 while Hong Kong is in second place with a 15.2% gain
for the year. So far this week the global equity markets have
been a positive price driver for oil 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 the main oil
price driver and the global economy and oil fundamentals a close
second this week's oil inventory report may not be much of a
price catalyst especially if the actual outcome is within the
range of the 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 the recent storm on the east coast. I am expecting a
modest build in crude oil inventories, a build in gasoline and
another draw in distillate fuel stocks as the weather was colder
than normal over the east coast during the report period. I am
expecting crude oil stocks to increase by about 1.2 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 46.3 million barrels while the overhang versus the
five year average for the same week will come in around 44.8
million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Ok
as the Seaway pipeline is still pumping and refinery run rates
are continuing at high levels in that region of the US. This
would normally be bearish for the Brent/WTI spread in the short
term but the spread is currently trading at a relatively high
premium to Brent but off of the highs hit about a week or so ago.
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
close to the $23/bbl level as of this writing. The widening of
the spread should begin to ease once the North Sea returns to a
more normal production level and the situation in the Middle East
quiets down.
With refinery runs expected to increase by 0.2% I am expecting a
build in gasoline stocks. Gasoline stocks are expected to
increase by 1.0 million barrels which would result in the
gasoline year over year deficit coming in around 6.7 million
barrels while the deficit versus the five year average for the
same week will come in around 2.1 million barrels.
Distillate fuel is projected to decrease by 0.8 million barrels.
If the actual EIA data is in sync with my distillate fuel
projection inventories versus last year will likely now be about
18.2 million barrels below last year while the deficit versus the
five year average will come in around 28.4 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 mostly in
directional sync with this week's projections (except for crude
oil). As such if the actual data is in line with the projections
there will be a modest change in the year over year inventory
comparisons for crude oil.
I am keeping my view at neutral with a bias to the bullish side
for today primarily due to the evolving geopolitical situation in
the Middle East. At the moment there is no shortage of oil
anyplace in the world but the market is slowly building a risk
premium into the price of oil in anticipation of a spreading of
the fighting taking place between Israel and Hamas as well as the
civil war in Syria.
The geopolitical risk is currently the only bullish price driver
for oil as the current fundamentals as well as the slowing of the
global economy are both bearish price drivers for oil. In the
short term the price of oil will move based on the evolution of
the situation in the Middle East. This is an event driven move in
the price of oil at the moment. BE CAUTIOUS as many diplomats are
trying to broker a cease fire. If successful we will see a sudden
drop in oil prices.
I am keeping my Nat Gas price view at neutral as the fundamentals
and technicals are once again keeping suggesting that the market
may have topped out for the short term. I anticipate that the
market will remain in a trading range until it becomes clearer as
to how the heating season will evolve.
Markets are mixed into the US trading session as shown in the
following table.
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.
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