Oil lower ahead of EIA inventory report this morning

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By Dominick A. Chirichella | January 25, 2013 1:41 AM EST

So much for the narrowing of the Brent/WTI spread. Yesterday the spread bounced back with a vengeance after the operators of the Seaway pipeline announced a capacity limitation on one of the Seaway links and thus lowering the pumping capacity to the US Gulf Coast to just 175,000 bpd to the Jones Creek terminal versus normal capacity of 400,000 bpd. Further adding to the bullishness of the spread was Enbridge announcing that the Spearhead pipeline from Chicago to Cushing is heavily prorated for March implying that that there will be full flows of crude into Cushing for both February and March. At the moment the problems are increased inflows into Cushing and restricted outflows... simply short term bullish for the spread.

The spread gained about $1.80/bbl during yesterday's trading session mostly as a result of a sell-off in WTI with Brent remaining relatively steady. Overnight there has been a bit of profit trading with the spread narrowing by about $0.50/bbl so far. The bottleneck problem around the Seaway line is going to postpone the eventual narrowing of the spread until the logistics can be de-bottlenecked. So far I have not see any timetable as to a return to normal flow from the Seaway pipeline.

On a more forward note that will eventually also impact the flow of oil in and around the mid-west is the Keystone XL Pipeline from Canada. The Governor of Nebraska has approved the new route through Nebraska and has approved the pipeline from the state's perspective. This now throws the whole project back to the US State Department and ultimately the President since the pipeline crosses an international border. So far a majority of the US Senate... a bipartisan group of 53 Senators (more than half) are in favor of going forward with the line. The Republican majority House of Representatives is also in favor of the approval with the House Speaker sending the President a letter yesterday asking for immediate approval. Certainly approval of the line will have a negative impact on the Brent/WTI spread but will have more of a longer term impact as the line will take several years to be in place if approved.

On the economic front manufacturing data out of China and the EU were both supportive for the oil complex as well as the broader commodity complex. The main economic and oil demand growth engine of the world... China saw its preliminary PMI number come in at 51.9 for January or the fastest pace in about two years. The number compares with the 51.5 final reading for December. The latest PMI data suggest that China's economy is likely to grow at a faster pace than the 7.9% GDP number for the fourth quarter. With the oil complex constrained on the demand side of the equation the latest Chinese PMI number is certainly a bullish data point in support of the forward fundamentals.

On a another positive note for the global economy as well as the oil complex the latest services and manufacturing output out of the Euro Zone contracted at a slower pace in January. The composite index for both services and manufacturing rose to 48.2 in January from 47.2 in December. This is a positive for the region although the number is still not back into the expansion mode which would need to see readings exceeding the 50 level. The latest data point along with ECB President Draghi suggesting this week that the worst of the EU debt crisis is over points to the EU possibly slowly working its way out of recession and back into a growth pattern. Overall a small positive for the oil complex from Europe this week (so far).

Global equities are now slightly positive for the week as shown the EMI Global Equity Index table below. The Index is now higher by 0.1% for the week widening the year to date gain to 2.8%. London and the US are holding the top two spots in the Index with last year's overwhelming number one leader... Germany now at the bottom of the leader board. Equities have been supportive for the oil complex as well as the broader commodity complex.

At the moment we are in the heart of the fourth quarter earnings season with some noteworthy surprises to the upside as well as misses to the downside in corporate earning. Most noteworthy was last night's miss by Apple which has sent the stock down by almost 9% in afterhours trading. With many equity markets at multi year highs there is a lot of volatility around the various earning reports from the major international corporations. So far overall earnings (basis Zack's score card) are relatively positive with 65% of the S&P companies that have reported beating earnings. Overall of those that have reported earnings are up 1.7% year over year while revenue is higher by 5.2%. There are a lot more companies yet to report so the volatility in the equity sector will be prevalent for several more weeks.

Yesterday's API report was mixed with a larger than expected build in crude oil, a surprise draw in gasoline and another surprise build in distillate fuel. Total crude oil stocks increased by 3.2 million barrels versus an expectation for a more modest build. Gasoline showed a surprise draw in inventory while distillate fuel stocks increased versus an expectation for a small draw. The API reported a 3.2 million barrel build in crude oil stocks versus an industry expectation for a modest build of around 2 million barrels even as crude oil imports decreased but offset by a significant decline in refinery run rates by 3.7%. The API reported a modest build in distillate and a draw in gasoline stocks.

The API report is neutral to bearish as total stocks built even with the draw in gasoline. The oil 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 PADD 2 stocks increasing by 0.6 million barrels while Cushing stock decreased by .5 million barrels. On the week gasoline stocks decreased by about 1.6 million barrels while distillate fuel stocks increased by about 1.3 million barrels.

My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally. I am expecting a modest build in crude oil inventories after last week's modest inventory build, a build in gasoline and a small draw distillate fuel stocks as the weather was more winter like over the east coast during the report period. I am expecting crude oil stocks to increase by about 1.8 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 27.3 million barrels while the overhang versus the five year average for the same week will come in around 36.5 million barrels.

I am expecting a small draw in crude oil stocks in Cushing, Ok as the Seaway pipeline has been has been running near its expanded capacity for most of the report period. This will be bearish for the Brent/WTI spread in the short term as the spread is currently trading at its lowest level since late September. The narrowing of the spread should gain a bit more momentum over the next month or say as discussed above.

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 million barrels which would result in the gasoline year over year surplus coming in around 8.9 million barrels while the surplus versus the five year average for the same week will come in around 11 million barrels. If the actual gasoline build is in sync with my projection gasoline stocks will have built by about 36 million barrels since November.

Distillate fuel is projected to decrease by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 13.6 million barrels below last year while the deficit versus the five year average will come in around 16.5 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 not in directional sync with this week's projections. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for just about everything in the complex.

I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a further move to the upside now that the spot WTI contract has breached its upper resistance level.

I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather forecasts. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish at the moment.

This week the EIA will release its inventory on its normal schedule and time...Thursday January 24th at 10:30 AM. This week I am projecting an average withdrawal of 170 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 withdrawal of 162 BCF and the normal five year net withdrawal for the same week of 176 BCF. Bottom line the inventory surplus will narrow marginally this week versus last year and hold steady compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year but below the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.

If the actual EIA data is in line with my projections the year over year deficit will widen to about 155 BCF. The surplus versus the five year average for the same week will come in around 321 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 120 BCF to about a 180 BCF net withdrawal with the Reuters market consensus around a 167 BCF net withdrawal.

Markets are mostly lower heading 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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*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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