Yesterday the market continued to focus on the bearish oil fundamentals while picking up downside support from the externals. The U.S. dollar continued in its firming pattern which began last Friday while equity markets in the United States and globally declined. WTI is trading solidly in the old trading range that was in place from July to mid-October. Burgeoning inventories in PADD 2 are putting additional pressure on the spot Nymex WTI contract as inventories approach the maximum level in PADD 2. This has been reflected in both the WTI/Brent spread as well as the forward curve, which has moved deeper into contango. Since the second half of November the Jan/Feb WTI intermonth price spread has seen its contango widen by over $1/bbl.
On the financial front the U.S. dollar has staged its strongest recovery rally in months gaining ground steadily since Friday’s jobs number release. The three day streak may be over for the moment as the dollar is now back on the defensive in overnight trading. Even with the dollar firming by almost 3% (versus the euro) over the last three trading sessions, the dollar is still clearly in a downtrend. It will have to take a much more significant move to the upside for the dollar to finally be out of the downward pattern that it has been in for months. Over the medium term the dollar is more likely to weaken rather than to stage a major significant move to the upside. The dollar (versus the euro) is currently trading around the same level it was trading at back in early November with most signs suggesting the current move has been mostly driven by short covering rather the entry of new longs coming into the dollar.
The direction of the dollar over the last three sessions have not only been negative to oil and other commodities but also it has been a drag on the global equity markets. The EMI Global Equity Index (table shown below) has continued to decline over the last 24 hours and is now down on the week so far. On the week the Index is currently down by about 1.3% bringing the year to date gains for the Index back below the 50% mark to 49.4%. Over the last 24 hours only two bourses in the Index have been trading in positive territory: France and Germany. Most every other exchange in the Index has experienced declines of over 1%. Much like the currency markets the trend in the equity markets has been nothing short of unbelievable and as such any declines have been mostly corrective in nature over the last six months or so.
Moving back to the fundamental side of the equation yesterday’s EIA Short Term Energy Outlook report was mostly biased to the bearish side as they even lowered their projections of oil demand growth for 2010 versus last month’s report. Following are the main highlights of the report.
EIA’s forecast assumes that U.S. real gross domestic product (GDP) grows by 1.9% in 2010 and world oil-consumption-weighted real GDP grows by 2.6%.
EIA expects the price of West Texas Intermediate (WTI) crude oil will average about $76 per barrel this winter (October-March). The forecast for the monthly average WTI price dips to $75 early next year then rises to $82 per barrel by December 2010, assuming U.S. and world economic conditions continue to improve. EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $4.62 per thousand cubic feet (Mcf). This represents a $0.67-per-Mcf increase from the estimated 2009 price of $3.95 per Mcf.
EIA forecasts that world oil consumption will grow in 2010 by 1.1 million barrels per day (bbl/d) to 85.2 million bbl/d, down slightly from last month’s Outlook. Countries outside of the Organization for Economic Cooperation and Development (OECD) are likely to account for almost all of this growth. Projected OECD oil consumption grows by only 0.1 million bbl/d in 2010, despite a projected 0.27 million bbl/d increase in the United States after a very weak 2009.
OECD commercial oil inventories stood at 2.77 billion barrels at the end of the third quarter of 2009, 115 million barrels more than the five-year average. Inventories are projected to be at 58 days of forward cover at the end of 2009, 5 days above the 5-year average for that time of year. EIA expects OECD oil inventories to remain above average historical levels throughout the forecast period.
EIA expects total natural gas consumption will decrease by 1.9% in 2009 and by an additional 0.4% in 2010. A steep decline in demand by the industrial sector, and smaller but significant declines in the residential and commercial sectors, have been partially offset by consumption growth in the electric power sector this year. Assuming a storage withdrawal between the end of November and the end of March about 6.1 percent (113 Bcf) greater than the previous five-year average for that period, end-of-winter (March 31, 2010) stocks will be about 1,845 Bcf. This would be the highest end-of-winter storage level since 1991, when inventories measured 1,912 Bcf.
This morning the EIA will release their latest snapshot of oil inventories. Late yesterday afternoon the API released their numbers which were just full of surprises. The API numbers are summarized in the following table along with the projections for this morning’s EIA report as well as a comparison to last year and the five year average for the same week assuming the actual numbers are in line with the projections.
The biggest surprise of all in the API report was the huge decline in crude oil stocks of 5.8 million barrels. The big decline was mostly in PADD 3 or the Gulf Coast with PADD 2 stocks actually building by about 2 million barrels. On one hand a bullish crude oil number but on the other hand not very bullish for WTI or the short WTI/long Brent spread. The market has reacted positively to the API crude oil number in overnight trading as crude oil prices are firm. If the EIA data is in sync with the API number it could turn out to be a bit of a bullish day for oil prices. However the API report has generally not been in sync with the EIA report and a price reversal after the numbers are released could just as easily be the outcome today.
On the refined product front more surprises: a decline in gasoline stocks and a build in distillate fuel as refinery utilization rates increased by 1.3% on the week. With a strong increase in refinery runs the unexpected decline in gasoline stocks in the API report is a big surprise with a question mark attached to it. Similarly last week the Northeast experienced a bit of normal winter weather and yet distillate stocks built strongly on the week (about 1 million barrels). Part of the answer lies in the big increase in refinery utilization rates as the refining sector is clearly on a max-max distillate mode as gasoline stocks have been in a building pattern.
The latest API report resulted in more of a market reaction that has normally been the case. In particular the market reacted to this part to the report in overnight trading as the HO/RBOB spread has narrowed significantly overnight and resulted in my getting stopped out (at a nice profit). It also raises a question mark for this spread if in fact the EIA report shows a similar result as the API report. I still like being long HO/short RBOB and if the data continues to be supportive I will look for a new entry point. In addition the big decline in crude oil stocks reported by the API has resulted in a modest retracement in the WTI/Brent spread even though PADD 2 stocks built strongly on the week. I still like being short WTI/long Brent but I would be very careful and keep my stops active as today could be one of those reversal days depending on the outcome of the EIA inventories.
My individual market views are detailed in the table at the beginning of the newsletter. I have not changed any of my market views as we are in a bit of a confusing and possibly a transition market. The externals are back in support mode so far this morning while the API report was viewed constructively by the market and will remain the driver unit the EIA report is released at 10:30 AM EST. I expect today will be a high volatile day with a greater than normal susceptibility for price reversals, especially after the EIA report is issued and if it differs from the API numbers. With little if any new economic data expected to hit the airwaves today the main driver for oil prices is likely to be the fundamentals while Nat Gas prices continue in a short covering rally based on the anticipation of some colder than normal temps hitting parts of the US over the next few weeks. Again do not lose site of the fact that Nat GAS supply is beyond adequate. The EIA is projecting (see above) end of winter Nat Gas stocks to still be at the highest level ever even if withdrawals from inventory are about 6% above the normal 5 year average withdrawal.
Currently prices are higher across the board except for the US dollar which is back on the defensive.
