WTI is still hovering near the upper end of the upward trading channel that has been in play since the beginning of this year. The spot WTI contract is also gaining momentum on Brent as the March WTI/Brent spread has now retraced about $0.70/bbl since peaking after the Seaway pipeline constraint news hit last Wednesday. The spread has narrowed back below the $17/bbl technical support line (now resistance) and seems poised for a further correction to the downside as the Seaway situation seems to have moved out of the foreground for the moment.
Further supporting the WTI contract on Monday was the announcement by Hess that they are closing their east coast Port Reading refinery (basically a cat cracker) in February as they complete their exit from the refining business. In addition they have put up their east coast wholesale terminal system (about 18 million barrels) for sale as they move more toward being an E&P company. This has been the trend for a lot of the integrated oil companies as the downstream side of the business has consistently lagged the profitability of the upstream side of the equation for years. The Hess facility is a 70,000 bpd refinery that basically produces gasoline and blending components for heating oil and distillate fuel. With the heating oil market on the east coast switching to ultra low sulfur the additional cost to modify the facility to meet the new east coast specs are prohibitive according to Hess. This facility has lost money the last two out of three years.
This is certainly good news for the refiners that have decided to continue operations on the east coast like Delta Airlines as well as potential exporters of gasoline and distillate from Europe. This action should keep gasoline prices somewhat supportive in PADD 1 which currently has it total gasoline inventory level (around 53 million barrels) running at the lower end of the normal operating range for gasoline inventories in that region of the US. Over the last twenty years or so gasoline inventories have run from a tad below 50 million barrels to a high of about 69 million barrels. Basis last week's EIA data current gasoline inventories are about 6 million barrels below last year at this time and about 7 million barrels below the five year average level for the same week.
How much of an impact the closure of the Hess facility will be on prices in the region will be dependent on several factors. How quickly and how much supply will be available to the region from external sources... imports and a diversion of US Gulf Coast exports. Of interest gasoline imports to the PADD 1 region have been declining since peaking in the first half of 2011. Currently imports of gasoline are running near the lowest level in over eight years (last week's imports were at 413,000 bpd). This suggests to me that there is much more capacity for imports to make up a major portion of the lost production from the Hess facility. Also if the US Administration would waive the Jones Act vessel requirements for say the spring and summer season a small part of the almost 500,000 bpd of gasoline exports (mostly from the US Gulf Coast) can then be economically diverted to the East Coast if needed. Unfortunately I do not expect that to happen anytime soon.
In addition gasoline demand in the US has been in a steady decline over the last four over five years. To the extent that this pattern continues (likely in my view) some of the lost supply may not have to be made up as demand shrinks further. At the moment the market has viewed the announcement by Hess as a bullish signal for gasoline sending the spot Nymex RBOB contract higher by over $0.06/gal at one point during Monday's trading session. Overnight prices have retraced by about $0.0230/gal but are still showing a solid gain for the week to date so far.
On the economic front yesterday's durable goods data from the US was very positive beating the previous month as well as the market consensus. The reaction was dampened by an underperformance on the housing data side. Today the US Central Bank will start its two day January FOMC meeting with the meeting announcement due out tomorrow mid-day. The market is currently expecting the Fed to remain status quo on their short term interest rate and quantitative easing policies. However, the market is much more interested in the comments as to see if there are any signs as to when the Fed will begin to move to a less accommodative monetary policy. More and more of the market participants are expecting the Fed to slow down its massive QE bond buying program as many also view the US economy as starting to recover at a better pace than last year. If that is truly the pattern of the economic recovery in the US the Fed will have to begin to shrink its balance sheet as the susceptibility for inflation will certainly rise if they do not.
Barring the Washington politicians completely screwing up the sequester negotiations as well as the US budget and fiscal cliff over the next several months the US economy does look like it is gaining momentum. If so I think the Fed will be forced to start not only thinking about an exit strategy but also making it know to the market. If this turns out to be the scenario it would be bearish in the short term for oil and most major commodity markets as it will signal that the Fed will not let inflation turn out to be the next major economic hurdle in front of the US economic recovery. With the Fed's policy also tied to the US employment situation we could get another sign on Friday when the monthly US nonfarm payroll data is released.
Global equity markets have given back some of their year to date gains over the last twenty four hours as shown in the EMI Global Equity Index table below. Most global equity markets have been in a strong uptrend so far this year and are nearing multi year highs. Many of the bourses are also in an technical overbought mode and are susceptible for a round of profit taking selling. We may have seen some of that over the last twenty four hours. As I mentioned in yesterday's newsletter there are many data points hitting the media airwaves this week that could act as a catalyst for a market correction. If we do get an equity market correction it will likely flow to the oil complex as well as the broader commodity markets. At the moment the EMI Index is lower by 0.75% for the week resulting in the year to date gain narrowing to 1.9%. London and the US continue to hold to two top spots in the Index while Brazil is at the bottom of the list and now in negative territory for the year to date.
The weekly oil inventory cycle will follow its normal schedule this week. The weekly oil inventory cycle will begin with the release of the API inventory report on Tuesday afternoon and with the more widely followed EIA oil inventory report being released Wednesday morning at 10:30 AM EST. With geopolitics still less of an issue or price driver than it was the last month or so the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.
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 small draw in gasoline and distillate fuel stocks as the weather was more winter like over the east coast during the report period and as refinery runs continue to decline ahead of US maintenance season. I am expecting crude oil stocks to increase by about 2.5 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 26.7 million barrels while the overhang versus the five year average for the same week will come in around 37.5 million barrels.
I am expecting a build in crude oil stocks in Cushing, Ok as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading above the level it was trading at just prior to last week's Seaway pipeline announcement.
With refinery runs expected to decrease by 0.2% I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.1 million barrels which would result in the gasoline year over year surplus coming in around 3 million barrels while the surplus versus the five year average for the same week will come in around 5.2 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 million barrels below last year while the deficit versus the five year average will come in around 15.2 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 move to the upside now that the spot WTI contract has breached its upper resistance level. That said I am raising the caution flag that an equity market correction will impact oil prices in much the same way... round of profit taking selling.
I am moving my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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.
Markets mostly lower heading in 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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