Oil on the defensive

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By Dominick A. Chirichella | November 13, 2012 11:31 PM EST

It is difficult to find an area of the world where uncertainty is not the main catalyst in all of the financial and commodity markets. In Asia consumer spending is slowing as the Japanese economy fights its third recession in four years while stocks in Taiwan are currently getting hit with a round of selling as exports continue to decline. In Europe German investor confidence unexpectedly declined in November as the euro falls to a two month low as the market continues to be concerned over the evolving Greek bailout... an issue that has been plaguing Europe for almost four years. In the US the looming fiscal cliff and overall disappointing third quarter corporate earnings reports all point to a slowing of this economy.

Bottom line the major negative that has been impacting all financial and commodity markets for most of this year is still the main negative catalyst... the slowing global economy sprinkled with the potential for major negatives like the possible failure to reach agreement on the fiscal cliff or additional Greek bailout funds... just to name a few. As the global economy goes so goes oil demand and commodity demand in general. The IEA in their monthly report just released this morning (see below for the highlights) lowered global oil consumption figures by another 60,000 bpd for 2012 versus last month's report while also showing that Iranian oil production and exports rose in October after falling for seven months. Supply continues to grow while demand continues to slow.

The IEA just released their latest monthly oil report. Following are some of the highlights from this report.

Oil futures prices fell to four-month lows in late October and early November amid mounting pessimism over the global economic outlook. Prices fell further after the US presidential election on worries over the so-called US 'fiscal cliff' looming at end-year, with Brent last trading at $109.25/bbl and WTI at $86/bbl.

The forecast of 4Q12 global oil demand has been cut by 290 kb/d since last month's report, to 90.1 mb/d, reflecting persistent weakness in Europe and the impact of Hurricane Sandy in the US. The 2012 growth forecast has been reduced by 60 kb/d to 670 kb/d.

Non-OPEC production rebounded by 840 kb/d in October, to 53.4 mb/d, after seasonal maintenance and weather disrupted output in September. Non-OPEC supplies are expected to grow by 460 kb/d in 2012 and by 860 kb/d in 2013, to 54.1 mb/d.

OPEC crude oil supply dipped by 30 kb/d to 31.15 mb/d in October, a nine-month low, even as Iran halted a seven-month supply downtrend with a small rebound. The 'call on OPEC crude and stock change' for 4Q12 has been lowered by 500 kb/d, to 30 mb/d, due to a weaker demand outlook and a stronger forecast of non-OPEC supply.

September OECD total oil commercial inventories increased by a steep, counter-seasonal 15.2 mb in September, extending six months of builds, to 2 746 mb. Forward demand cover stood at 59.6 days, flat with an upwardly revised August estimate. Preliminary data indicate OECD oil stocks rose by 5.5 mb in October.

Global refinery throughputs averaged 75.9 mb/d in 3Q12, as recovering Chinese runs and strong OECD margins, notably in Europe, offset US hurricane outages. A seasonal dip is expected to leave 4Q12 runs at 75.5 mb/d. Annual growth is projected to rise to 1.1 mb/d in 4Q12 from 0.6 mb/d in 3Q12.

Global equity markets lost value across the board over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index has shed about 0.6% over the last twenty four hours with the year to date gain narrowing to 4.5%. The EMI Index is now at the lowest level it has been at since the first half of August. China remains the only bourse still in negative territory for the year but Brazil is currently on the cusp of going negative which just a 0.5% year to date gain. Germany is still holding the top spot with a gain of 20.6% for the year. Since the election the US Dow has lost about 1/3 of its year to date gain as uncertainty as to the fiscal cliff still remains the main catalyst for this market. At the moment the global equity markets remain a negative price driver for oil and the broader commodity market.

The weekly oil inventory cycle will be moved by one day due to the US government holiday on Monday. The weekly oil inventory cycle will begin with the release of the API inventory report on Wednesday afternoon and with the more widely followed EIA oil inventory report being released Thursday morning at 11 AM EST. With the global economy and oil fundamentals continuing to be the main focus of the trading and investing community this week's oil inventory report could be a price catalyst especially if the actual outcome shows a large deviation from the projections. However, any inventory reaction could be short lived if the macroeconomic data, the fiscal cliff and Greece remain the main focus of most market players.

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 2.3 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 40.1 million barrels while the overhang versus the five year average for the same week will come in around 45.2 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 has been the main driver that has resulted in the Nov Brent/WTI spread now trading over 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.

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 1.8 million barrels while the surplus versus the five year average for the same week will come in around 0.3 million barrels.

Distillate fuel is projected to decrease by 0.4 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 16.1 million barrels below last year while the deficit versus the five year average will come in around 26.6 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 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 maintaining my overall view for the oil complex at cautiously bearish now that the spot WTI contract has breached its range support that has been in play since mid September. The new resistance level is the old range support level of $87/bbl. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics have continued to remain an issue for market participants.

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.

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


Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.

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