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Thursday Morning May 19, 2011
Quote of the Day
What is the meaning of life? to be happy and useful.
The one two combination of a bullish oil inventory report and a weaker US dollar was more than enough to move the oil complex higher across the board in a modest short covering or relief rally that began after the API data was released late Tuesday afternoon and continued throughout yesterday's entire trading session. Prices are drifting lower so far this morning as the US Dollar Index has moved back into positive territory. WTI has dropped back below the psychological $100/bbl mark as of this writing with trading still solidly in the $94.50 to $104/bbl trading range that has now been in place for the last several weeks. Yesterday's bullish oil inventory report may have raised the floor or what I have been calling the fundamental "put" in the oil price and if the fundamentals continue to improve it could reduce the likelihood of the market breaching the lower end of the trading range anytime soon. On the other hand the bullish fundamentals were certainly not strong enough to expect prices to surge through the upper end of the trading range solely on fundamental support. For WTI to test and breach the $104/bbl level the market is going to need the support of a weaker USD and firming global equity market.
Although the US Dollar Index a marginally firmer this morning (so far) it has failed to breach and break out of the downward channel that has been in place for most of this year. In fact the latest upward leg within the channel seems to be losing momentum and may be setting up for a move back to the lower end of the channel. If so oil could get the boost it need to at least make a pass of testing the $104/bbl technical resistance level. Of interest Goldman Sachs cut their forecast for the US dollar on the basis that the US economy is lagging behind many other nations in their economic recovery. GS said that with unemployment still high, fiscal consolidation looming and continued weakness in the real estate sector, the growth outlook remains less compelling in the US than in many other regions or countries. If one accepts or buys into the GS view of the USD going forward then one has to assume that GS is once again getting bullish on oil as a move to the downside for the USD will almost certainly result in an uptick in oil prices as well as many other commodity prices. A US Fed member said yesterday that the downward correction in oil and other commodities over the last several weeks has taken some of the pressure off of inflation risk thus curbing the need to begin to withdraw record stimulus from the economy. That is a bit of a bearish endorsement for the USD over the short to medium term and another data point that oil may be setting up for a test of the $104/bbl level.
Global equity markets are still mostly supportive for oil prices as the recovery rally was still in place in parts of Asia last night even as Japan's GDP went negative (as a result of the earthquake and tsunami disaster). Equity values in Europe are mildly in positive territory so far this morning while US equity futures are trading in positive territory indicating a firmer opening on Wall street in a few hours. Overall global equity markets are slowly regaining their footing after the rout that occurred over the last few weeks.
On the fundamental side of the equation yesterday's EIA inventory report was definitely a mixed picture but in the end biased to the bullish side. The fundamentals were a positive in that total commercial stocks (crude oil and refined products combined) declined marginally and broke the last two week pattern of gains in stock levels. It suggests that the longevity of the destocking pattern that has moved into the US inventory scene over the last month or so may be returning after a few week rest. A week does not make a trend so we will have to watch how this evolves over the next few weeks. In particular implied demand declined increased this week suggesting that the retracement in prices over the last few weeks may have been enough to send the US consumer back to their normal driving habits. For now I view the fundamentals as a price floor.
The market did react strongly to Wednesday's EIA inventory report as a result of the evolving geopolitics remaining relatively quiet. The market viewed the report as mostly bullish with prices rising across the complex. For the fourth week in a row investor/traders garnered price direction guidance from outside the umbrella of the normal macro events like the geopolitics and the falling USD... only this week it was to the upside. Overall Wednesday's EIA inventory was biased to the bullish side. The inventory report showed a small decline in total stocks, an increase in implied demand, and a large decline in crude oil inventories in PADD 2 and Cushing, Ok stocks even as total US crude oil stocks were about unchanged on the week. With refinery margins still holding refinery utilization rates increased strongly on the week to 83.2% of capacity an increase of 1.5% in refinery run rates. The EIA oil inventory report was supportive across the complex. 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 decreased on the week... by 0.1 million barrels. This week's decrease broke the two week string of gains. With today's decline total commercial stocks in the US are now lower by about 36.2 million barrels over the last several months. The year over year status of total commercial stocks of crude oil and refined products remain in a deficit position for the ninth week in arrow. The year over year deficit is around 39.9 million barrels while the overhang versus the five year average for the same week widened to 15.7 million barrels.
Crude oil inventories were about unchanged versus most expectations for a modest build. The crude oil inventory overhang versus last year widened to 7.6 million barrels while the surplus versus the five year average also widened to 20.6 million barrels. PADD 2 and Cushing, Ok stocks decreased strongly on the week with stocks in this region of the US finally moving off of the record high levels they have been at for an extended period of time. Basis this week's data there should be a bit more market pressure on the Brent/WTI spread which could result in additional selling of the spread (selling Brent and buying WTI) over the next several sessions. Over the last few days WTI basis July contract) has gained a tad over a $1/bbl relative to the July Brent contract. If refinery run rates continue to increase we could expect to see further declines in crude oil stocks in the mid-west which would be supportive for WTI relative to Brent.
Distillate stocks drew more than the expectations for a modest build in stocks. Heating oil/diesel stocks decreased by 1.2 million barrels versus an expectation for a build of around 0.8 million barrels. The year over year deficit widened to 9.7 million barrels while the five year average overhang narrowed to 15.5 million barrels.
Gasoline inventories increased marginally on the week versus an expectation for a modest build in stocks. Total gasoline stocks increased by about 1.0 million barrels on the week versus an expectation for a build of about 0.1 million barrels. Over the last three months or so gasoline stocks are now lower by over 8 million barrels. The deficit versus last year widened is now at 15.9 million barrels while the deficit versus the five year average for the same week narrowed to 2.4 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 categorized everything in the complex as bullish except for crude oil which is a neutral this week. However, I still have to call the overall report biased to the bullish side.
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 moving my bias to neutral as the market seems to be setting up for a test of the upper end of the trading range.
I am maintaining my Nat Gas view at cautiously bearish but keeping my bias at neutral until I see how Nat Gas market reacts to today's EIA inventory reprot.
Currently asset classes are marginally lower after yesterday's modest upside rally. Today's losses are currently attributable to some mild profit taking selling as the trading community continues to operate with a very short term time horizon. 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.
Dominick A. Chirichella