Some of the uncertainty that was looming over all of the
markets this week is now in the background. The OPEC meeting
ended with a rollover agreement (as I suggested) with the group
kicking the can down the road for a year on the election of a new
Secretary General. A view that the economy is starting to show
signs of stabilization coupled with the main oil demand growth
engine of the world... China now projected to show its oil demand
growth growing at a faster pace than previously projected (latest
IEA monthly report) was enough for OPEC to take a wait and see
approach to production levels. This will be an issue that will
most likely have to be dealt with sometime during the first half
of the year especially if supply continues to outstrip demand.
Today in the EU another tranche of aid was approved for Greece
while the EU Finance Ministers finally agreed to put the ECB in
charge of all of the banks. Greece is now moving further into the
background and will remain a secondary market driver for the next
several months or until the next Greece crisis emerges. The
agreement to put the ECB in charge of all of the banks will move
the EU one step closer to financial integration. The agreement
opens the door for the EU's financial firewall to now provide
direct bailout to the banks under the direction of the ECB. As is
always the case with the EU there are still many details that
will have to be worked out prior to the start date of the new ECB
authority on March 1, 2014. Overall pushing Greece into the
background coupled with the new agreement by the EU Finance
Ministers is a positive for the EU economy as well as the EU
equity markets at least for the short term.
In the US at least one of the major uncertainties is out of the
way... the outcome of the last US FOMC meeting of the year. As
expected the Fed replaced Operation Twist with a new or
additional round of quantitative easing... let's say QE3a or QE4
that will entail the buying of another $45 billion dollars of
long term Treasury instruments. Thus starting in January the Fed
will be printing about $85 billion dollars per month to provide
liquidity to the long term bond markets... both mortgage and
treasury instruments.
The Fed also added more transparency to their programs by tying
the unemployment rate to interest rates and QE. Unlike most
Central Banks around the world the US Central Bank has a dual
mandate that includes an objective to stabilizing the US economy
at full employment. In his presser yesterday Chairman Bernanke
called the current state of the US labor market... an enormous
waste of human and economic potential. This is the first time the
Fed is announcing the linking of their programs to employment in
the public domain.
They are linking their interest rate outlook to economic
thresholds (which has always been the case with no details in the
public domain). They said publically for the first time that
rates will remain low as long as the unemployment rate remains
above 6.5% and if the Fed projects inflation of no more than 2.5%
one or two years into the future. The Fed does not expect the
unemployment rate to hit their threshold until 2015. So for the
moment the Fed will be providing a lot more liquidity into the US
economy which overall is a positive for more risk asset
markets...although the reaction has been somewhat muted since the
announcement on what I would describe as a buy the rumor, sell
the fact action in the equity and commodities trading pits... as
the Fed action was mostly expected.
Although the Fed uncertainty is now out of the market the looming
fiscal cliff trigger is not. Although both sides have exchanged
new proposals the Republicans indicated yesterday afternoon that
they are still far apart on an agreement even as the President
once again indicated that a deal will be reached. I am still
expecting a deal and as I have discussed on numerous occasions
the markets are going to be impacted by the 30 second news
snippets hitting the media airwaves from both sides until a deal
is finally reached. I still expect a deal before the Christmas
holiday breaks for the politicians in Washington DC. Overall the
looming fiscal cliff remains a negative for the markets in the
very short term or at least until the next positive comments hit
the media airwaves.
The EMI Global Equity Index was little changed over the last
twenty four hours as a very light round of profit taking selling
hit after the US Fed announcement. As shown in the following
table the EMI Index was about unchanged with the week to date
gain still sitting around 1.4% resulting in the gain for 2012
holding at 9.5% or the highest level since April of this year.
Global equities have staged an impressive rally since bottoming
out in the middle of November especially with all of the
headwinds and geopolitical events that have been looming overhead
during that time frame. The short term trend for most of the
global equity markets has been in an uptrend as most all of the
clouds overhanging the market have been somewhat settled except
for the US budget deal. Global equities have been a positive
price driver for the oil complex as well as the broader commodity
markets.
Yesterday's EIA inventory report was simply bearish as total
commercial stocks increased strongly on the week. Overall I would
categorize the report as biased to the bearish side as total
commercial stocks increased modestly along with an increase in
crude oil inventories as crude oil imports increased on the week.
In addition refinery utilization rates decreased slightly by 0.2%
on the week to 90.4% of capacity. 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
increased by 5.9 million barrels. The year over year surplus came
in at 44.5 million barrels while the surplus versus the five year
average for the same week widened to 46.3 million barrels.
Crude oil inventories increased (by 0.8 million barrels) and
above the market expectations for a decline. Crude oil
inventories have been increasing steadily for most of this year
and are still well above the levels they were at during the
height of the recession as well as being at the highest level
since 1990. With the increase in stocks this week the crude oil
inventory status versus last year is still showing a surplus of
around 36.5 million barrels while the surplus versus the five
year average for the same week came in around 41.8 million
barrels. Crude oil imports increased modestly on the week.
PADD 2 crude oil inventories surged by about 1.6 million barrels
while Cushing, Ok crude oil inventories also increased by about
1.2 million barrels on the week. The large gain in crude oil
inventories in PADD 2 and in Cushing is bullish for the Brent/WTI
spread. The Jan spread is trading near the $23/bbl level as of
this writing and approaching the contract high for the spread
made in the third week in November.
Distillate stocks increased above the range of expectations even
as refinery run rates decreased by 0.2%. Heating oil/diesel
stocks increased by 3 million barrels on a week that experienced
modestly colder than normal temperatures along the highly
populated north east. The year over year deficit came in around
23 million barrels while the five year average remained in a
deficit of about 28.2 million barrels.
Gasoline inventories surged well more than the expectations for a
much smaller build. Total gasoline stocks increased by about 5
million barrels on the week versus an expectation for a smaller
build. The deficit versus last year now switched to a surplus of
2.1 million barrels while the surplus versus the five year
average for the same week widened to about 7.4 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 bearish categorization on the week for
everything in the complex except jet fuel. Overall this week's
report was biased to the bearish side as total stocks are once
again back to increasing.
I am maintaining my view and bias at cautiously bearish as the
fundamentals are still biased to the bearish side as well as the
technicals. At the moment 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. In the short term the price of oil
is still very susceptible to sudden price moves based the 30
second news snippets. However, the fundamentals, the markets view
of the global economy, the US fiscal cliff negotiations and less
so the geopolitics will be the price drivers in the short term
pretty much in that order. 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 now positioned to test the lower end of the trading
range... even after last week's bullish 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.
This week the EIA will release its inventory report on its normal
schedule... on Decembers 13th at 10:30 AM. This week I am
projecting a small withdrawal of 5 BCF from inventory. My
projection for this week is shown in the following table and is
based on a week that experienced a minimal amount of Nat Gas
heating related demand. My projection compares to last year's net
withdrawal of 79 BCF and the normal five year net withdrawal for
the same week of 113 BCF. Bottom line the inventory surplus will
widen significantly this week versus last year and compared to
the five year average if the actual numbers are in sync with my
projections. This week's net withdrawal will be significantly
below the net withdrawal level for last year and below the five
year average net withdrawal for the same week if the actual
outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year
over year surplus will widen to about 41 BCF. The surplus versus
the five year average for the same week will also widen to around
276 BCF. This will be a bearish weekly fundamental snapshot if
the actual data is in line with my projection. The early industry
projections are coming in a wide range of a 1 BCF build to about
a 30 BCF net withdrawal with the consensus looking for a net
withdrawal of 4 Bcf (Reuters poll).
Markets are mostly lower into the US trading session as shown in
the following table.
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.
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