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Optimism over the Greek Parliament approving the austerity budget and thus opening the window for the next phase of bailout funds to flow has been providing enough enthusiasm over the last twenty four hours to result in a modest short covering rally in just about every risk asset including oil. The market is anticipating a passage of the budget with the vote likely coming sometime between 7 to 10 am EST. Although this is very unpopular among the majority of Greek citizens it is viewed as the path of least resistance insofar of Greece not defaulting on its debt.
With the Greek headwind likely to move to the back burner and with positive manufacturing data out of Japan rising at the fastest rate in about 50 years (as it begins to rebuild its country) market participants are slowly starting to change their sentiment toward the global economy and starting to pick up its pace of recovery and thus a positive for oil prices at the moment. There are still a lot more data points regarding the energy intensive manufacturing sector to be released in the next few days and as such we may still see a lot more volatility before the week is out. But for today we can say that the market is back to a risk on trade mentality and will remain in this pattern until proven differently or until the next batch of less supportive data hits the media airwaves.
On the equity front global equity markets have continued to recover as shown in the EMI Global Equity Index table below. The Index has now gained 1.4% for the week narrowing the year to date loss to 5.3%. Seven of the ten bourses in the Index are still in the negative column for the year with Brazil still holding the bottom spot in the Index. It is still too early to say whether the market has bottomed or what we have seen this week is all short covering and window dressing as the quarter comes to an end. I still think the move so far this week is more a result of short covering and end of quarter window dressing and not yet a structural change in the markets. As such we may see some additional choppy trading as a plethora of important data will be hitting the media airwaves over the next week or so including the always important and market moving US nonfarm payroll numbers to be released a week from Friday. For today equities are a positive for oil prices as well as the broader commodity complex.
The US dollar has been falling over the last several days and has also been providing support to the oil and commodity complex as confidence continues to build that the Greek bailout will flow. As I have been suggesting for weeks there is a high probability that the EU will be successful in kicking the Greek can down the road and as such we can expect to see a continuation of the short covering rally in the euro that began a day or so ago which in turn will pressure the US dollar. In addition ECB head Trichet signaled yesterday that the ECB is on vigilance watch meaning that there is a high likelihood that the ECB will raise short term interest rates when they meet next week further supporting the euro over the US dollar. I expect this pattern to continue in the short term thus provide support for the oil complex.
On the tropical weather front the National Weather Service has named its first tropical storm of the season. Tropical Strom Arlene is sitting in the eastern bay of Campeche. At the moment the NWS is projecting that the path of the storm will bring it to landfall in Central Mexico over the next 24 to 36 hours with no chance of it impacting the oil and Nat Gas rich portion of the US Gulf Coast. It also seems to be north of Mexico's oil operations and as such it does not look like it will impact Mexican production. That said it is simply a reminder that the tropical weather season is just getting under way with the heart of the season still in front of us.
On the oil fundamental front last night's API report was mixed and mostly neutral in my view with crude oil marginally bullish while refined products were mostly bearish. The API data was mostly within the market expectations showing an expected decline in crude oil inventories, a modest build in distillate stocks and gasoline inventories with refinery utilization rates coming in unchanged.
The API reported a crude oil inventory draw of only about 1.4 million barrels even as refinery utilization rates remained at 86.5% of capacity while imports increased only modestly. The API reported a modest decline of about 0.5 million barrels and at Cushing, Ok. Crude oil stocks in the mid-west are still high but with this week's decline they are around the level they were at back in February of this year. They showed a build in inventory for distillate fuel and gasoline stocks. The market was expecting a modest build in gasoline stocks and a modest build in distillate fuel inventories this week. On the week gasoline stocks increased by about 0.6 million barrels while distillate fuel stocks were higher by about 1.0 million barrels. The results of the API report are summarized in the following table. So far the market is not reacting much to the API report as the industry awaits the EIA report later this morning. If today's EIA report is in sync with the API report I would view it as mostly neutral.
With the markets continuing to look for oil price direction we may see the weekly inventory reports have a directional impact yet again this week. At the moment with all of the financial uncertainty permeating around the global markets along with IEA talk still continuing it is difficult to say when this week's report will impact the market (if at all). The normal weekly reports get underway late this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Wednesday morning at 10:30 AM (EST). My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed report with a modest decline in crude oil stocks as a result of another week of reduced imports and a small increase in refinery utilization rates. I am expecting a modest build in both gasoline inventories and distillate fuel stocks. I am expecting crude oil stocks to decline by about 1.6 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will continue to hover around 0.9 million barrels while the overhang versus the five year average for the same week will narrow to 20.7 million barrels. My projection risk for crude oil is to the upside as stocks could have actually built depending on the combination of how much additional crude oil came through the Keystone pipeline versus the level of refinery runs in PADD2.
If the inventories are in line with the projections I would expect to see a decline in both PADD 2 and Cushing crude oil stock levels which would potentially impact the Brent/ WTI spread. Since peaking around June 15th the spread has narrowed by almost $7/bbl (partly a result of the IEA oil release announcement). As I discussed in last week's newsletter I expect the spread to continue to narrow. With US refiners gradually increasing refinery utilization rates... inventories in this region are looking like they are entering a destocking pattern. PADD 2 stocks are now back down to earlier year levels when the spread was trading in a range of $12 to $14/bbl premium to Brent. If stocks continue to decline I would expect the low double digit level as the next target for the spread during what looks like the correction phase.
With refinery runs expected to increase by about 0.2% I am expecting a modest build in gasoline stocks as demand likely decreased while imports possibly increased. Gasoline stocks are expected to build by about 1.0 million barrels which would result in the gasoline year over year deficit coming in around 2.5 million barrels while the surplus versus the five year average for the same week will narrow to about 6.7 million barrels. All eyes will be focused on the gasoline number once again this week after last week's surprise build in stocks for the sixth week in a row and heading into a long holiday weekend in the US.
Distillate fuel is projected to increase modestly by 1.0 million barrels on a combination of no weather demand as well as an increase in production. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 16.4 million barrels below last year while the overhang versus the five year average will be around 6.6 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 experienced a similar change in inventories as what I am expecting this week. As such I do not expect much of a change in the year over year status if the actual numbers are in line with my projections.
As usual do not overreact to the API data as more often than not it is not in line with the more widely followed EIA data. If the EIA report is within the projections I would expect the market to view the results as mostly neutral. However, whether or not the market reacts at all to the inventory report will be dependent on what is going on in the financial markets especially surrounding the very important vote in Greece.
For today I am upgrading my oil bias back to neutral. I still think there are more indications that expose the market to a period of choppy trading but the short term bias has switched to the upside for the moment as the US dollar has weakened while equities are rallying around the globe on optimism that the Greek bailout will get approved today.
I am moving my Nat Gas view and bias to neutral as prices are now in the midst of a short covering rally and trading at a level that suggests prices may make a further move to the next upside resistance level prior to a re-test to the downside.
Finally of interest the IEA oil release has almost moved completely to the back burner with oil prices now off by just $2/bbl basis WTI and a tad over $4/bbl basis Brent since the IEA made their announcement last Thursday...so much for the IEA stimulus program. As I have been discussing for days this action looks very much like the currency interventions that have happened numerous times in the past with the results of this oil intervention currently performing much like the currency interventions...little lasting impact on prices.
Currently most risk asset classes are higher as shown in the following table.
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
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