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 trading range.
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 the complex.
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
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