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Wednesday Morning May 18, 2011
Quote of the Day
You are not a pawn in the chess game of life, you are the mover of the pieces.
Yesterday was yet again another risk off day in the world of oil and other commodities. About the only commodities that were able to hold onto gains were in the agricultural sector as the Mississippi River floods and opening of the spillway have definitely impacted this year's crops. In addition to the above the market is becoming more and more concerned that the US economy is growing at only a snail's pace and as such industrial related consumption is likely to underperform most all of the forward projections...including the EIA Short Term Energy Outlook. Yesterday the latest industrial production numbers came in unchanged for April after increasing 0.7% in March while new home construction numbers plunged yet again. Both indicators suggest that the US economic recovery is slowing down rather than gaining any upside momentum.
Although the slowing of the US economy contributed to yesterday's selling it is also contributing to the recovery in prices overnight as it has resulted in the US dollar moving back in the defensive as the economic slowing points to the US Central Bank continuing to move forward with its accommodative monetary policy even after QE 2 ends in June. In fact some are even starting to believe that the US Fed may embark on another variation of quantitative easing after the end of QE2. The Fed has not signaled that view as of yet but one thing that seems clear is the Fed is not likely to raise short term interest rates anytime soon or as long as there is still a huge unemployment problem in the US (the headline rate is still at 9%).
Further pushing the US dollar overnight is the easing concerns over the sovereign debt issues in Europe and a bit of a relief rally as progress was made yesterday insofar as the Portugal bailout program even though there is turmoil at the IMF. Also the EU Economic and Monetary Commissioner indicated today that Europe's recovery is becoming more solid and is undeterred by the tensions surrounding the sovereign debt issues. The recovery is becoming more solid and self-sustaining. This is a positive for the euro, a negative for the US dollar and thus supportive for higher oil prices as well as other commodities. At least for this morning the lower US dollar is a positive for the relief rally currently in place in the oil complex.
On the equity front the global equity markets are also in recovery stage overnight as shown in the EMI Global Equity Index table below. The EMI Index has recovered all of its losses for this week and is now sitting at the same level it was at to end last week. In fact over the last twenty four hours the only bourse that did not gain ground was the US Dow. However, as of this writing US equity futures are currently in positive territory and are pointing to early gains when the US equity markets open in a few hours. At the moment the global equity markets are also supportive for oil and other commodity prices.
The oil relief rally got underway shortly after the API released their weekly oil inventory report late yesterday afternoon. The API report was mixed but mostly bullish on several counts. The API reported a crude oil inventory build of about 2.7 million barrels as refinery utilization rates decreased by 0.5% to 81.7% of capacity. The API reported a big decline in crude oil stocks in Cushing, Ok of about 1.5 million barrels or the largest one week decline in a long time (over a year). They showed another large surprise decline in inventory for distillate fuel and a modest decline in gasoline stocks. The market was expecting builds in both gasoline and distillate fuel this week. On the week gasoline stocks decreased by about 700,000 barrels while distillate fuel stocks were lower by about 2.8 million. The results of the API report are summarized in the following table. So far the reaction to the API report has been bullish as the market has been in relief rally mode throughout the overnight trading session. If Wednesday's EIA report is in sync with the API report I would view it as bullish and it is likely to result in an extensions of the rally that is currently in place. If the EIA data is in agreement with eh API data it will not signal that the next leg of the bull market is now underway but it will provide some fundamental support at the current price level.
With a light economic calendar today the EIA inventory report could wind up being the main price driver for oil prices today and possibly for the rest of the week. Heading into today's session the oil market is oversold and a short covering rally should not be a surprise especially if this morning's inventory report is the least bit bullish.. My projections for this week's inventory reports are summarized in the following table. I am expecting another bearish report with an across the board build in all components of the complex as well as in total combined commercial stocks of crude oil and refined product inventories. I am even expecting the second build in gasoline inventories in a row. I am expecting crude oil stocks to build by about 1.1 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil would come in around 8.7 million barrels while the overhang versus the five year average for the same week will widen to 21.8 million barrels.
Even with refinery runs expected to increase by only about 0.2% I am expecting a build in gasoline stocks as demand likely slipped and imports increased on the week. Gasoline stocks are expected to build by about 0.9 million barrels which would result in the gasoline year over year deficit narrowing to 15.1 million barrels while the deficit versus the five year average for the same week will also narrow to 1.7 million barrels. All eyes will be focused on the gasoline number this week after last week's surprise build in stocks for the first time in about three months. Gasoline demand is definitely on the defensive as last week's implied demand number was even lower than it was for the same time period during the heart of the recession two years ago. Although oil prices have declined on the financial and futures side the average retail gasoline price in the US is still only about $0.056/gal below the psychological $4/gal that 62% of American consumers indicated that at this level they would cut back on their driving. So far they have and it is likely to continue. With falling demand and refiners slowly raising run rates after the maintenance season I would expect gasoline stocks to build for the next three or four weeks and thus catch the attention of the gasoline sellers.
Distillate fuel is projected to increase modestly by 0.8 million barrels on a combination of minimal weather demand as well as an increase in production. The weather forecasts are a neutral for heating oil especially for this time of the year. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 7.7 million barrels below last year while the overhang versus the five year average will be around 17.4 million barrels.
Net result the US continues to remain well supplied but with the below normal inventory levels in gasoline stocks the fundamentals are still mildly supportive but this could be changing for gasoline as discussed above..
As usual do not overreact to the API data which will be released later today as more often than not it is not in line with the more widely followed EIA data. If the EIA report is within the projection I would expect the market to view the results as bearish as total commercial stocks of crude oil and refined products combined are likely to have increased versus last week. However, as mentioned above if it is in agreement with the API data it will be viewed as bullish.
My individual market view is detailed in the table at the beginning of the newsletter. I am still not sure how to suggest where the market is heading in the very short term as the market is still in the emotional phase and currently mired in the wide trading range as I have been discussing for the last week or so. For the short term I am keeping my overall view at neutral and keeping my bias at bearish as the market seems to be in a sell the rally mode. I plan on remaining on the sidelines for the moment or at least until I see how the market digests today's EIA inventory report.
I am maintaining my Nat Gas view at cautiously bearish but keeping my bias to neutral until I see how Nat Gas reacts to everything going on with the Mississippi floods.
Currently asset classes are mostly higher as shown in the EMI Price Board table below. Today's gains are currently attributable to more stability in the EU sovereign debt issues as well as the US dollar moving into negative territory versus most major currencies overnight. Continue to keep a close watch on the evolving flooding situation in the Mississippi river and the impact it could possibly have on the oil and NG sectors in the Gulf Coast.
Finally on the geopolitical front the Libyan oil minister defected indicating that Gaddafi's inner circle is continuing to fall apart and possibly another sign that a diplomatic solution for Gaddafi leaving Libya could possibly be a bit closer. That said the bombing and the fighting continues to rage on and any diplomatic solution is still in the hope or only possible mode rather than very close to being done. I bring this up as any sudden change in the diplomatic front will quickly result in a negative for oil prices as the last of the risk or fear premium will be removed from the market price very quickly and offset any positive potential gains from other drivers like a negative US dollar or a positive oil inventory report.
Dominick A. Chirichella
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.