The oil complex is starting the week cautiously firm as the fighting between Israel and Hamas continues for another day. Both side are continuing to lob missiles at each other with the possibility of ground force activity as Israel has called up thousands of reservists. As this part of the Middle East is not an oil producing area the current activity has not resulted in any lost supply of oil. However, the instability in the region is growing from the current activity along with the evolving situation in Syria which has seen its civil war spreading outside of its borders. If the uncertainty and instability spreads to the southern part or oil producing part of the Middle East it could certainly result in a supply disruption and thus a further firming in oil prices... which is the last thing the faltering global economy needs at this point in time.
At the moment the market is building a modest risk premium into the price of oil even though oil is well supplied. There is no shortage of oil anyplace in the world as supply has continued to outstrip demand. Demand has been suppressed by the slowing of the global economy and likely to continue to remain under pressure as it does not look like the global economy is ready for a growth spurt anytime soon... based on the macroeconomic data that has been released from all corners of the world over the last month or so. Even China... the main economic and oil consumption growth engine of the world does not look like it is ready for any major resurgence in the short to even medium term. In fact based on the latest EIA STEO report China is only expected to see an increase of about 400,000 bpd in its oil consumption in 2013 (versus 2012). With total non-OPEC supply expected to increase by about 1.2 million barrels per day China is not going to be able to reverse the evolving trend of supply outstripping demand all by itself.
For now the firming of oil prices is primarily being driven by the evolving situation in the Middle East and the perception that it could ultimately lead to a supply disruption at some point down the road. There is currently no shortage of oil any place in the world and thus the current fundamentals are biased to the bearish side. On the demand side of the equation there is no reason to believe that there will be a surge in oil demand anytime soon as the major economies of the world... US, Europe and China are all going nowhere quick. Thus for now we have to focus on the geopolitics for directional guidance for oil in the short term.
On the economic front there may be a ray of hope coming from the first round of talks that took place on Friday between the President of the US and Congress regarding a solution to the pending fiscal cliff. Both sides expressed optimism that a deal will be negotiated before the end of the year. This gave the global financial markets a bit of a boost as many equity markets are being hit with a light round of short covering. This will be a roller coaster ride insofar as the 30 second news snippets that hit the media airwaves over the next two to four weeks. However, as I have been indicating for quite some time in the newsletter I still expect a deal to be put in place as neither side will be willing to risk sending the US economy back into another recession. If the global equity markets begin to rally in anticipation of a deal in the US it could also serve to firm oil prices over and above what is taking place from a geopolitical perspective.
The oil complex ended the week mostly higher... with the exception of Nymex HO... mostly on the growing geopolitical risk in the Middle East. WTI and Brent gained about the same amount on the week. WTI increased by 0.70% or $0.60/bbl as Brent gained about 0.49% or $0.53/bbl. Crude oil stocks in PADD 2 and Cushing were modestly higher on the week. The Jan Brent/WTI spread was relatively flat widening by just $0.16/bbl as the normalization process is only slowly proceeding. In fact the Jan spread is currently trading at the highest level in months as the North Sea is still experiencing a slow recovery from maintenance.
On the distillate fuel front the Nymex Nov HO contract decreased by 0.62% or $0.0187/gal on the week even as distillate fuel inventories decreased modestly on the week. Gasoline prices increased on the week. The Dec Nymex gasoline price increased by 0.40% or $0.0109/gal this past week.
Nat Gas futures put in another strong performance ending the week in positive territory. The December Nat Gas futures contract increased by 8.19% or $0.287/mmbtu on the week and is now approaching the key psychological level of $4.00/mmbtu as the market continues to be focusing on the upcoming winter heating season.
As I have mentioned on several occasions the Nat Gas market is now primarily being driven by the current and expected temperatures across the major areas of the US that consume Nat Gas for heating. In addition the net outcome of the level of heating related demand over the next several months will directly translate to the level of Nat Gas in inventory. With the first net withdrawal from inventory (Thursday's EIA report) the surplus in inventory is now just 1.8% above last year at this time... a significant reduction from where it was back in early April of this year.
The very near term temperatures across most of the northeast is a bit colder than normal and will result in a modest level of Nat Gas heating related demand over the short term. However, the latest NOAA six to ten day and eight to fourteen day forecasts are still calling for above normal temperatures across a significant portion of the US for the period November 18 through the end of the month (at least). The only part of the country shown in the forecast that is expecting below normal temperatures will be Florida. If the actual temperatures do in fact come in as projected we could see one of two more small injections into inventory before hitting the main part of the winter heating season and the part of the season that the forecasters are expecting much colder temperatures than last year.
On the financial front equity markets around the world were mostly lower for the week as market participants continued to look at the many signs that suggest that the global economy is likely to slow even further. Europe is now in recession. The decrease in equities were mostly a result of the view that all of the money printing by central banks around the globe have not had much of a positive impact on the global equity markets. Global equity values decreased as shown in the EMI Global Equity Index table below but are still marginally in positive territory for the year.
The EMI Index decreased by 1.3% on the week with the Index now showing a year to date gain of just 2.8%. Over the last week the Index decreased in value in most all of bourses with three bourses now in negative territory for the year... China, Brazil and Canada. Over the last several months the global equity markets have been struggling to stay in positive territory and have been consistently losing value over this timeframe. The Index is now trading at the lowest level since the second half of July.
The euro was higher on the week as was the US dollar. Last week the global equity markets were a bearish price driver for oil and most commodity markets for most of the week's trading sessions.
I am keeping my view at neutral with a bias to the bullish side for today primarily due to the evolving geopolitical situation in the Middle East. At the moment there is no shortage of oil anyplace in the world but the market is slowly building a risk premium into the price of oil in anticipation of a spreading of the fighting taking place between Israel and Hamas as well as the civil war in Syria. The geopolitical risk is currently the only bullish price driver for oil as the current fundamentals as well as the slowing of the global economy are both bearish price drivers for oil. In the short term the price of oil will move based on the evolution of the situation in the Middle East. This is an event driven move in the price of oil at the moment.
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 higher 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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