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Follow my intraday comments on Twitter @dacenergy.
NOTE: I will not be publishing the Energy Market Analysis on Monday, May 30 in observance of Memorial Day in the US
Dominick
Thursday Morning May 26, 2011
Quote of the Day
The only place success comes before work is in the dictionary.
Vince Lombardi
The oil complex staged a decent rally in the face of mostly bearish news and price drivers. In fact oil hit a two week high as most commodities also moved into positive territory in what looked like a bit of risk on and some end of the month window dressing by the funds that I have been suggesting would happen. In addition I think there was a general short covering rally in most risk assets including equities as many participants square their books ahead of the long holiday weekend in the US. I would expect liquidity to start to decline from today forward and not get back to more normal levels until early next week.
From a technical perspective WTI remains in the triangular consolidation pattern but has already made two minor attempts to break out to the upside. At the moment the price remains poised for at least another solid attempt to make a move out of this pattern to the upside as shown in the following chart. If we get a solid break above and a close above I would say the market would have an increased probability of moving higher and testing the range resistance of around $104/bbl. For the moment the technicals are on the cusp of providing a new long signal...but not just yet as I would wait for a breakout before taking action.
On the currency front the US Dollar Index has lost ground for the third day in row as it has failed to breakout above its current resistance level. This pattern is suggesting another leg down before meeting its next support area at around 74.70. If this level is breached then there is a decent chance that the US Dollar Index will eventually make an attempt to test the low of the down move made back in early May. All of a sudden the US dollar sentiment is changing a bit with more participants moving slowly back to the bearish camp and a reversal from the view earlier in the week.
Fundamentally not much has changed the EU is still struggling with the sovereign debt issues of the southern European countries while the US economy is growing at a snail's pace suggesting that an easy money policy will remain in place in the US for an extended period of time. Over the last year or so each time there has been a flare up of the sovereign debt issues in the EU they have had a negative impact on the euro, commodities and equity markets for a relatively short period of time and then the sentiment changes and the issues move into the background for a period of time. We may be at that point in time when the EU problems begin to move to the background once again.
One factor impacting the direction of the euro and thus the USD has been China reportedly making a decision to increase it purchases of European bonds. There is an indication that China may buy Portuguese bailout bonds when they hit the market in June. This talk has resulted in the euro gaining ground versus most major currency pairs for the first time in four days and has resulted in the USD moving lower. The bottom line the currency market realignment over the last twenty four hours has been a positive for most all risk assets including the oil complex.
Global equities have recovered some of their lost ground with the EMI Global Equity Index now unchanged for the week but still showing a year to date loss as shown in the following table. The EMI Index has recovered all of its week to date losses (so far) narrowing the year to date loss to 3.5%. Six of the ten bourses in the Index still remain in negative territory for the year with Brazil still at the bottom of the list with the US Dow still leading the group in the winners column. Stimulus and easy money is still driving the US equity complex while monetary tightening to mitigate inflation risk is still driving the emerging market bourses like Brazil and China. For today the global equity markets are a positive for oil prices.
Yesterday's EIA inventory report certainly impacted the direction of oil prices but not in the direction of the initial reaction that occurred when the data was first released. With the exception of distillate fuel the report was bearish on most all other counts. The fundamentals were an overall negative in that total commercial stocks (crude oil and refined products combined) increased strongly resulting in the fourth weekly gain in stocks out of the last five weeks. It is certainly looking like the inventory destocking pattern that has been in place is possibly coming to an abrupt halt. In fact in the last five weeks total commercial stocks in the US have increased by about 24 million barrels. A few weeks does not make a trend so we will have to watch how this evolves over the next few weeks.
The market did react strongly to Wednesday's EIA inventory report as a result of the evolving geopolitics remaining relatively quiet. The market viewed the report as mostly bearish with prices for everything other than HO/diesel fuel prices declining immediately after the data was released. However, the combination of a strong rally in HO prices coupled with a change of fortune in the direction of the USD was enough to push the entire complex into positive territory by late morning. For the fifth week in a row investor/traders garnered price direction guidance from outside the umbrella of the normal macro events like the geopolitics and the falling USD... only this week it was to the upside. Overall Wednesday's EIA inventory was biased to the bearish side (irrespective of how prices evolved on the day). The inventory report showed a large increase in total stocks, an increase in implied demand, and a modest increase in crude oil inventories along with a surge in gasoline stocks. With refinery margins still holding refinery utilization rates increased strongly on the week to 86.3% of capacity an increase of 3.1% in refinery run rates. The EIA oil inventory report was bearish across the complex (except for distillate fuel). The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
Total commercial stocks of crude oil and refined products increased on the week... by 6.8 million barrels. With this week's increase total commercial stocks in the US are still lower by about 29.4 million barrels over the last several months (but narrowing). The year over year status of total commercial stocks of crude oil and refined products remain in a deficit position for the tenth week in arrow. The year over year deficit narrowed a bit to 38.9 million barrels while the overhang versus the five year average for the same week widened to 19.5 million barrels.
Crude oil inventories increased versus most expectations for a modest decline due to a projected increase in refinery runs. Refinery runs increased strongly but crude oil stocks still increased as imports surged. The crude oil inventory overhang versus last year came in around 5.8 million barrels while the surplus versus the five year average widened to 22.5 million barrels. PADD 2 decreased modestly on the week with stocks in this region of the US finally moving off of the record high levels they have been at for an extended period of time. Basis this week's data suggests that there should be a bit more market pressure on the Brent/WTI spread. However, with production problems persisting in the North Seas (Forties in particular) the WTI has continued to depreciate modestly versus Brent over the last several sessions.
Distillate stocks drew more than the expectations for another strong decline in stocks. Heating oil/diesel stocks decreased by 2.0 million barrels versus an expectation for a build of around 0.5 million barrels. The year over year deficit widened to 11.9 million barrels while the five year average overhang narrowed to 11.9 million barrels. The big story on the distillate front is the additional flow of distillate fuel to China as there hydroelectric power capacity has been severely impacted by an ongoing drought. This has resulted in distillate fuel from all over the world heading in that directions they continue to increase their imports. That all said how long it lasts (as the Chinese economy is starting to show signs of slowing) is still an unknown but for now distillate fuel prices are leading the entire energy complex higher as demonstrated by yesterday's trading activity after the EIA data was released.
Gasoline inventories increased strongly on the week versus an expectation for a much smaller build in stocks. Total gasoline stocks increased by about 3.8 million barrels on the week versus an expectation for a build of about 0.4 million barrels. Over the last three months or so gasoline stocks are now lower by only 4.2 million barrels. The deficit versus last year narrowed to 11.9 million barrels while the deficit versus the five year average for the same week moved to a surplus of 0.4 million barrels. With gasoline demand still depressed and refinery runs and imports on the rise it certainly looks like there will be plenty of gasoline for the upcoming driving season which get underway this weekend it the US.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have categorized crude oil and gasoline as bearish, jet fuel as a neural and distillate fuel as bullish. However, I still have to call the overall report biased to the bearish side.
My individual market view is detailed in the table at the beginning of the newsletter. As I have been discussing the market is in a technical consolidation pattern with a low predictive level for the very short term time horizon. Prices remain within the technical triangular or consolidation pattern that has been in place for the last several weeks. However, as discussed and shown above WTI may be on the cusp of breaking out of the triangular pattern to the upside. If so we could see higher prices in the short term. For the short term I am keeping my overall view at neutral and as wells as my bias at neutral until the market breakouts out of the triangular consolidation pattern.
I am maintaining my Nat Gas view at cautiously bearish but keeping my bias to neutral as I still expect Nat Gas prices to make an attempt to test the $4/mmbtu level in the foreseeable future.
Currently asset classes are mixed as shown in the following table. We are approaching a long holiday weekend in the US as well as the end of the month which will result in window dressing coming from the funds which could result in a continuation of the short covering rally in risk asset classes that seem to begin yesterday.
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
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