With all else around it declining oil prices held steady on Wednesday and into today on one of those unforeseen geopolitical event in the middle east... Israel struck Gaza killing the top Hamas military leader. In a region that has been very unstable for a long time this just adds another layer of instability. Israel may be striking Hamas as they engage in a bit of a proxy war with Iran... a major supporter of Hamas. Now that the US election is over the Israeli's may be at the early stages of positioning themselves to get more aggressive in trying to destabilize Iran's nuclear program and yesterday's strike against Iran's proxy in the region could be just the beginning.
The gain in oil prices over the last twenty four hours was not significant based on the magnitude of the gains historically when these type of event takes place. The fact that the global oil market is well supplied has minimized the reaction in the oil pits. In addition until there is a clear sign that the instability in the region is spreading toward the oil producing states market participants are likely to approach this situation with caution and not overreact to the upside. That said as long as the tensions and military activity continues to evolve oil prices should find some price support in the short term. The markets will be watching how Obama handles what has been a strained relationship with Israel over the next several weeks. Based on the action by the Israeli's it suggests that they are not overly concerned as to the US reaction at the moment.
Back to the negatives impacting oil prices today the latest data out of the euro zone shows that the EU is now officially in a recession as it now has two quarters in a row with negative GDP. The latest Eurostat data showed third quarter GDP came in at negative 0.1% after declining by 0.2% in the second quarter. Even the main economic growth engine of the EU... Germany saw its third quarter GDP gain slip to 0.2% from 0.3% in the second quarter. On the other end of the spectrum Greece's economy contracted for the seventeenth quarter in a row. Even more directly related to the energy sector industrial production in the EU dropped by 2.5% in September (versus August) or the largest monthly drop in over three years.
In Asia as a new leader comes to power in China... the main economic growth engine of the world is certainly not humming along rather it is continuing to ride a very bumpy and uneven road. Data out of China overnight showed non-performing loans rose by $3.6 billion dollars... the fourth straight quarter of increase and the longest streak since at least 2004 (according to a Bloomberg article). This data strongly highlights that the Chinese economy is also weakening and not yet ready to lead the global economy out of the current malaise as it did after the major downturn in 2008.
Global equity markets have been very reflective of the economic uncertainly as most markets around the world were hit with a strong round of selling over the last twenty four hours. The EMI Index lost another 1.4% since yesterday narrowing the year to date gain for the Index to just 3.5% or back to the level it was at in early August. Three of the ten bourses in the Index are now in negative territory for the year...China, Brazil and Canada while Germany and Hong Kong are still showing double digit gains for the year. Since the US election the US Dow has lost about 5% of its value as President Obama continues to focus on raising taxes at a time when the US economy is continuing to weaken. Needless to say global equity markets as a leading indicator for the global economy are painting a bearish picture for all financial markets as well as for oil and the broader commodity markets.
The API report was mixed with the outcome not in directional sync with the range of expectations. The crude oil build was smaller than expected while gasoline stocks declined marginally versus an expectation for a build and distillate stocks increased marginally versus an expectation for a draw. The API reported a build (of about 1.3 million barrels) in crude oil stocks versus an industry expectation for a larger build as crude oil imports increased modestly while refinery run rates decreased strongly by 2.5%. The API reported a small build in distillate stocks. They also reported a small draw in gasoline stocks.
The API report is mixed and mostly a neutral weekly inventory snapshot. The market is mixed heading into the US trading session and ahead of the EIA oil inventory report at 11 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 build of about 1.3 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 1.1 million barrels. On the week gasoline stocks decreased by about 0.1 million barrels while distillate fuel stocks increased by about 0.2 million barrels.
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.
This week the EIA will release the report on its normal day and time... November 15th at 10:30 AM. This week I am projecting a withdrawal of 10 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 20 BCF and the normal five year net injection for the same week of 17 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and the five year average if the actual numbers are in sync with my projections. This week's injection will be modestly below 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 70.3% of last year.
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 80 BCF. The surplus versus the five year average for the same week will narrow to around 269 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 -32 BCF to plus 6 BCF with the consensus coming in around a draw of 14 BCF.
Markets are mostly higher 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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