The global risk asset markets are trading in a perception mode or a view that the stimulus coming from the US, Europe and likely China will be enough to jump start the faltering global economy. The view that inflation will be the outcome of all of the stimulus programs is pushing oil and other traditional commodities back to lofty levels. The objectives of QE3 are to bolster the economy and improve the weak jobs markets. With oil prices rising it certainly looks counterproductive as higher oil and other commodity prices are going to nothing other than slow the growth of the global economy even further. In addition it is hard for me to see how QE3 is going to create jobs. On top of the stimulus induced price moves the middle east is out of control with protests all over the region raising the risk premium on oil even further.
I must admit I view the current situation as a mess and it is hard to see how QE3 is going to make a difference in the US economy... an economy that is growing at less than 2%. This is also an economy that has just had its bond rating downgraded again by Eagan Jones on Friday to AA- and one that is facing the uncertainty of the fiscal cliff in just a few months and an major election in November. Furthermore with the growing unrest in the middle east and with the rhetoric between Iran and Israel picking up the market is once again building in the possibility of a some sort of a supply disruption from the region...most likely if Israel strikes Iran. I am far from an expert on what Israel will do over the next several months but the one thing that is obvious as a trader and/or hedger one has to set up their portfolios for just such an event and thus the reason why the risk premium is starting to widen once again.
Overnight protests have erupted now in Afghanistan in the Afghan capital burning cars and throwing rocks toward the US military base. This is in addition to protests in Pakistan and Indonesia and throughout the middle east. The risk of a further spreading of the violence is rising. Whether or not this violence will spread to the oil areas in the middle east is an unknown. But as market players see more and more unrest in an area of the world where a large amount of oil flows from the only reaction will continue to be to support higher oil prices. The combination of the geopolitical risk and the new rounds of stimulus should be enough to keep oil prices supported for the foreseeable future with limited downside risk in the short term. Certainly nothing goes straight up or down but at the moment the market looks like any corrections will be shallow and short lived and will most likely be viewed by the market as possible buying opportunities.
The oil complex ended the week mostly higher with the exception of RBOB gasoline as the US Fed announced an open ended round of quantitative easing. RBOB gasoline was the only energy commodity to end the week in negative territory. WTI increased a tad less than Brent as US crude oil inventories were less impacted by the Isaac shut-ins than expected. Crude oil stocks in PADD 2 were modestly higher while Cushing was about marginally lower on the week. The October WTI contract increased by about 2.68% or $2.58/bbl while the November Brent contract ended the week with a gain of 2.55% or $2.90/bbl. The Nov Brent/WTI spread widened marginally by about $0.18/bbl for the week as the normalization process is slowly proceeding. I still expect the spread to gradually continue to narrow over the next 6 months as the surplus in the US mid-west is starting to recede from a combination of exports of crude oil out of the region through the Seaway pipeline coupled with refinery utilization rates at the highest level in months.
On the distillate fuel front the Nymex Oct HO contract increased by 2.88% or $0.0906/gal on the week as distillate fuel inventories increased modestly on the week in spite of the refinery interruptions from Isaac. Gasoline prices decreased modestly on the week. The Oct Nymex gasoline price decreased by 0.13% or $0..0040/gal this past week.
Nat Gas futures regain some of their lost value with this week after another the bullish inventory report that was still reflective of the shut downs in production from Isaac. The October Nat Gas futures contract increased by 9.73% or $0.261/mmbtu on the week but is still trading below the key psychological level of $3.00/mmbtu as the market seems to be attempting to settle into a trading range of around $2.65 to about $3/mmbtu.
Although the weekly injection report was the main event for the Nat Gas market last week and prices have mostly traded around this report the main event for the global risk asset markets was the US Fed announcement that they are embarking on another round of quantitative easing... QE3.
The Nat Gas market had been anticipating this event and so far the market has reacted positively to the announcement as just about every risk asset market in the world is trading above where it was prior to the announcement... including Nat Gas which has recovered about 2/3 of it early post injection report losses. I do not expect a lasting impact on Nat Gas prices simply due to QE3 as the impact of QE3 is not going to have a major impact on consumption of Nat Gas and with the robust supply situation the inventory surplus is likely to grow during the shoulder season...irrespective of QE3.
Last week's EIA report was bullish from the perspective that the injection was well below both last year and the five year average. However, the 27 Bcf injection was within the expectations and just about at the market consensus. The EIA injection was at the consensus and below both last year's injection and the injection level for the five year average for the same week. The net injection of 27 BCF was below my model forecast (35 BCF) this week and below the range of market projections. The inventory surplus narrowed strongly versus both last year and the more normal five year average. The current inventory level has narrowed to 284 BCF above the five year average.
On the financial front equity markets around the world were mostly higher for the week on the back of the new solution presented by the ECB and QE3 by the US both of which are viewed as actions that will bolster the global economy. The increase in equities were mostly impacted by the announcement by the US Fed for an open ended QE3. Global equity values increased as shown in the EMI Global Equity Index table below are now solidly in positive territory for the year.
The EMI Index increased by 4.5% on the week with the Index now showing a year to date gain of 9.8%. Over the last week the Index increased in value in all of bourses with just one bourse still in negative territory for the year... China. Over the last several months the global equity markets have been struggling to stay in positive territory but the perception of what the new rounds of global easing might do to the global economy has moved market participants back into a risk on trading sentiment.
The euro was higher on the week while the US dollar was lower. Last week the global equity markets were a positive price driver for oil and most commodity markets during the second half of the week.
I still think the oil price is overvalued at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. That said prices are almost solely being driven in the short term by a combination of the outcome of the ECB meeting and the new round of QE along with the growing geopolitical risk in the mid-east. As mentioned above the bias is to the upside and any downside corrections are likely to be short and shallow and viewed by the market as buying opportunities.
I am keeping my view at neutral as the industry is back to normal operations after Isaac. At current prices the economics only marginally favor Nat Gas over coal but if prices do work their way to the upper end of the trading range utilities could begin to move back to coal.
Markets are mostly lower heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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