The post OPEC meeting premium is pretty much now out of the price of oil as WTI remains below the $100/bbl level while Brent is trading off of its highs but is still showing a gain above where it was trading prior to the OPEC meeting. Part of...if not all of the gains that are still in the price of Bent may be more related to the light loading program in the North Sea for the month of July rather than the failed OPEC meeting. As discussed in detail last week OPEC is in a bit of disarray with Saudi Arabia now seemingly in a position to act alone in its efforts to add more oil to the market place and cap any runaway price increase in the short term. All of the surplus crude oil capacity resides in three OPEC member countries...Saudi Arabia, Kuwait and the UAE with the bulk of it in Saudi Arabia. It is this group of OPEC countries led by the Saudi's that pushed for a 1.5 million barrel per day increase in production that was rejected by the majority of the remaining OPEC members who do not have any surplus capacity.
Since the meeting there have been discussions in the market regarding Saudi Arabia increasing production for July forward. A report in the Saudi based al-Hayat newspaper on Friday indicated that the Saudi's planned to increase production to 10 million bpd in July versus 8.8 million bpd that they produced in May. Although that report was not confirmed by other independent media sources the market felt there was enough credibility to the story as prices declined strongly on Friday and have not recovered any of those losses yet today (in fact additional losses are now occurring). In Asian trading hours there have been reports that the Saudi's are offering additional crude for July to the Asian refiners...pretty much their target market for adding oil as this is where demand growth is expected to be the most significant going forward. Whether or not the article in al-Hayat was accurate the Saudi's are offering additional crude oil to the refiners signally that there is potential for more oil to flow in the coming months. Whether the market needs this oil in the short term is a whole another question. But in my view if the Saudi's are able to put more oil in the market it would certainly be bearish and if the Saudi's are unable to add more oil based on lack of interest from the market (a possibility) it would also be a bearish indicating that the demand growth all are projecting may not be materializing. In either scenario the Saudi's are on their own to meet any additional demand from the market that materializes. They said they would do that and there is every reason to believe they will follow up on their commitment. This should keep a cap on prices in the short to even medium term.
Risk asset markets were mixed last week. Oil prices (with the exception of WTI) held up pretty well considering the magnitude of the sell-off on Friday. The geopolitical based oil risk premium is still in place but the way oil has been trading (basis WTI) I would expect trading to remain choppy in a trading range of around $94.50 to $104/bbl. Financial markets were mostly lower on the week on an overall slowing of the global economy sending negative signals to the market sentiment along with the evolving sovereign debt issues in Europe. Equity markets were lower in both the developed and developing world markets...led by the Asia economies as inflation fighting continues in that region of the world followed by slowing in the developed world. Precious metals hovered near the unchanged mark for the week ending the week with minor losses.
Over the last week the oil complex increased modestly for everything other than the spot WTI contract. The spot WTI contract depreciated strongly versus Brent even as crude oil inventories declined in PADD 2 but the ongoing production problems for July loadings in the North Sea have more than offset any positives that could have come from a decline in stocks in the mid-west portion of the US. In addition the decline in crude oil stocks in PADD2 may be temporary as the Keystone pipeline from Canada is now back to operating normally and flowing oil into the region. WTI traded and ended the week marginally below the $100/bbl level while the spot Brent contract closed near the $119/bbl mark. The Jul Brent contract ended the week with a gain of 2.54% or $2.94/bbl. WTI decreased by 0.93% or $0.33/bbl. WTI lost a tad over a $4/bbl versus Brent this past week. The spread actually traded at a record high differential on Thursday.
On the distillate fuel front the Nymex HO contract increased modestly even as distillate fuel inventories built strongly for the first time this season versus an expectation for a small build. Spot Nymex HO increased by 1.58% or $0.0484/gal. Gasoline prices experienced a small gain on the week even as gasoline stocks increased for the fifth time versus an expectation for a small build. The spot Nymex gasoline price increased by 0.82% or $0.0246/gal this past week. The big decline in WTI prices resulted in the 3-2-1 crack spread gaining about 8.7% on the week.
Nat Gas continued to hold its own on the week. The spot Nymex NG price increased by 1.06% or $0.050/mmbtu on the week. On the Nat Gas front the latest six to ten day and eight to fourteen day forecasts out of NOAA are still showing the vast majority of the eastern half of the US remaining in an above normal temperature pattern through at least June 23rd and possibly beyond. The very excessive heat experienced in many parts of the east has subsided a tad after a strong round of thunderstorms passed thorough yesterday and cooled things down marginally. That said it certainly looks like there will be an above normal amount of cooling demand required over the next several weeks and with the larger amount of nuclear generating capacity still shut down the weather load requirements are going to fall on Nat Gas as the fuel of choice for the moment.
The above said it seems the longs are very tenuous at best and very quick to exit (as we saw on Thursday) for the smallest of reasons. There is not a lot of conviction in the marketplace for a strong move back to the upside. Assuming the rate of return of the downed nuke plants accelerates (as it appears to be) the Nat Gas market is going to lose the extra atypical weather related demand it saw over the shoulder season and market players will once again refocus on the normal supply and demand balances for Nat Gas ...which seems to be improving but by no means are they strongly bullish as this point in time. In fact if one looks at all of the macroeconomic data that has been released over the last three weeks or so it definitely suggests the US and global economies are continuing to slow. If this pattern is more than a passing situation or as the US Fed chairman Bernanke likes to say "transitory" and more structural in nature industrial related consumption of Nat Gas is going to also slow. We have seen some very disappointing manufacturing data over the last few weeks that suggests a slowdown in this energy intensive sector of the economy. Bottom line the market may be setting up to move into another trading range pattern that will take us through the next several months barring any surprise hurricane or other unplanned or unexpected issues that impact either demand or supply.
On the financial front equity markets around the world ended the week lower as an economic slowdown continues to umbrella the investing world. Global equity values were on the defensive as shown in the EMI Global Equity Index table below as the macroeconomic data emerging from around the world was simply negative for the global economy. The EMI Index lost 2.0% on the week after a moderate loss the previous week. The EMI Index is now lower by just 5.3% for the year with seven of the ten bourses still in negative territory with another on the verge of going negative. The US Dow is still in the top spot of the winner's column...but barely above Germany. The EMI Index is now at the lowest level of the year and back to the level it was trading at in the middle of September of 2010. 2011 has certainly been a poor equity investment climate so far. Last week the global equity markets were a strong negative for oil prices as well as the broader commodity complex.
The US dollar index was higher on the week as the EU sovereign debt situation looked less promising as disagreements among the main players on how to structure the Greek bailout continued through most of last week. The currency markets are still in the midst of a major realignment as I have been warning for weeks. Cash flowed out of gold (and the rest of the precious metals complex) which decreased by 0.85% on the week.
My individual market view is detailed in the table below. For today I am continuing to remain neutral for my oil view and bias. The oil complex remains very choppy and is likely to remain choppy as it looks to settle back into a trading range. That said I also do not expect much of a push to the downside either and I think going forward we may be back to moving into a buy the dip mode. At this point I am still not sure where the dip is just yet. For today I am still remaining on the sidelines until all of the events have been fully digested by the market.
I am keeping my Nat Gas view and bias at neutral and still with an eye toward moving into the cautiously bearish category once this week's trading activity is fully digested by the market. I currently am sidelined and have no long side exposure in this market at the moment.
Currently asset classes are mostly lower as shown in the following table.
Dominick A. Chirichella