Oil prices firm as truce still not reached

The conflict between Israel and Hamas continues to be the main price driver for the oil complex. Yesterday the market was mostly under selling pressure on talks that a truce between both sides is near. Overnight the fighting has continued as the plethora of diplomats from the UN, US, Europe and Middle East all attempt to broker a deal between both sides. Part of the risk premium was taken out of the oil market on Tuesday but as talks linger as of this writing part of the risk premium is slowly coming back into the price. Until an official truce is announced the market is likely to be somewhat biased to the long side. However, Wednesday's session will be dominated by the 30 second news snippets that hit the media airwaves regarding the status of the cease fire talks.

Even as the talks continue an explosion hit a bus in the center of Tel Aviv while bombs are still flying from both sides. US Secretary of State Clinton is now in the region and has already had discussions with both side of the conflict including the President of Egypt who is also attempting to broker a truce. At the moment Reuters is reporting that Israel's leading newspaper said an emerging outline of a ceasefire agreement called for Egypt to announce a 72 hour ceasefire followed by further talks on long-term understandings. There are still many open issues from both Israel and Hamas that still need to be resolved before the deal can be agreed to and announced.

I would expect something to be done over the next twenty four hours or less. However, if the truce that is announced is as described above I do not think the entire risk premium will recede from the price of oil as the fact that more talks will occur indicates that the truce is one that could be violated relatively quickly. The geopolitics will keep a floor on the price of oil until it is clear that a long term agreement has been reached.

On the economic front some mixed signals overnight. First China... the main oil demand growth engine of the world reported a 13.8% increase in its crude oil imports for October compared to last October. That said I am not sure how much of that increase was due to new demand versus how much of it went into its growing Strategic Petroleum Reserve. Offsetting the import increase in China... Japan's crude oil imports decreased by 24.5% in October versus last October.

In Europe the EU Finance Ministers ended their latest round of Greek discussions with no solution other than an agreement to resume talks next Monday. There is still a disagreement between the EU and the IMF on how to help bring Greece back from its deep and ongoing recession. As I have discussed on many occasions this situation has been evolving for four years and based on everything that is floating around the media airwaves this situation will continue to be a negative cloud over Europe well into the future.

Global equity markets gained marginally over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index gained about 0.27% widening the year to date gain to 4.7%. On the week the EMI Index has gained 1.9% recovering all of last week's losses and then some. Germany and Hong Kong remain at the top of the list of bourses in the Index with China and Brazil holding the bottom two spots. For the first time in weeks the global equity markets have been a bullish price drive for the oil complex as well as the broader commodity complex. That said oil prices are primarily in an event driven mode based on the evolving situation in the Middle East.

The API report was surprisingly bullish on all fronts and not in directional sync with the range of expectations. Crude oil showed a surprise draw versus an expectation for a build. In addition both gasoline and distillate stocks showed large declines in inventory versus an expectation for a build in gasoline stocks and a much smaller draw in distillate fuel inventories. The API reported a draw (of about 1.9 million barrels) in crude oil stocks versus an industry expectation for a build as crude oil imports decreased marginally while refinery run rates increased strongly by 2.2%. The API reported a large draw in distillate and gasoline stocks.

The API report is bullish across the board with many participants now looking at this morning's EIA inventory report with much more interest. The oil market is firm heading into the US trading session and ahead of the EIA oil inventory report at 10:30 AM today. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. The API reported a draw of about 1.9 million barrels of crude oil with Cushing, Ok showing a strong build of 1.1 million barrels while PADD 2 stocks also built strongly by 1.5 million barrels. On the week gasoline stocks decreased by about 4.8 million barrels while distillate fuel stocks decreased by about 4.4 million barrels.

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 folowwing 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 moving my view back to neutral with a bias to the neutral 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 oil prices could decline even quickly from current levels if and when a truce is announced.

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.

This week the EIA will release the report one day early... on November 21st at 12 noon as the US markets and government is closed on Thursday for the Thanksgiving holiday. This week I am projecting a withdrawal of 25 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net injection of 9 BCF and the normal five year net injection for the same week of 3 BCF. Bottom line the inventory surplus will narrow modestly again this week versus last year and the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be well below the injection level for last year and the five year average for the same week if the actual outcome is in sync with my forecast. For interest the average for the injection season to date has been around 68.6% of last year.

If the actual EIA data is in line with my projections the year over year surplus will narrow to around 36 BCF. The surplus versus the five year average for the same week will narrow to around 182 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of -7 BCF to -40 BCF with the consensus around a draw of 24 BCF.

Markets are mostly higher into the US trading session as shown in the following table.

Note: Due to the Thanksgiving Holiday in the US the Daily Energy Market Analysis Newsletter will not be published on Thursday and Friday of this week.

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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