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Energy Toppy but Lots of News This Week
09/06/2012 1:30 am EST
In the US and Europe, the markets are anticipating a lot of news this week, so action should be interesting and may be volatile, notes Dominick Chirichella of Energy Market Analysis.
The markets are starting to build up for an announcement of a new bond-buying program out of the ECB when they meet on Thursday. There are still differences of opinion, as European leaders are now in the midst of a full-blown diplomatic effort to get some sort of consensus before the ECB meets.
On Monday, ECB President Draghi said that he would be comfortable buying three-year government bonds to aid nations that are having sovereign debt problems. Both Spanish and Italian short-term bonds dropped the most in about a month since his Monday comments.
The next few days will be critical as to the outcome, as there seems to be agreement at the 30,000-foot level, but as usual the devil is in the details. So far, the details are not nearly in as much of an agreement as the macro concept. Between now and Thursday, there will be many 30-second news snippets that are going to impact the direction of risk asset markets in both directions.
Monday was a quiet trading session, with the US closed for the Labor Day holiday. In addition to the ECB meeting on Thursday, the economic calendar is full of market moving data. On Tuesday, the labor picture data cycle began with the ADP and Challenger reports, followed by initial jobless claims on Thursday and culminating with Friday morning's monthly US nonfarm payroll data and the headline unemployment rate.
The early consensus for Friday's nonfarm payroll data is for about 125,000 new jobs, with the unemployment rate holding at 8.3%. If the actual report is in sync with the forecast, or lower, the data would likely be viewed as a supportive data point for the Fed in the decision-making process for more quantitative easing. The next Fed meeting is mid-September, and this is the last jobs report before that meeting.
Global equity markets are drifting lower so far this week, as shown in the EMI Global Equity Index. The Index is already lower by 0.6% on the week after declining by 1.2% last week. The year to date gain has narrowed to 3.3%, with China still in bear-market territory (over 20% decline over the last 12 months) and at the bottom of the list of bourses in the Index. Germany continues to show double-digit gains for the year, with the rest of the bourses still showing mediocre gains for 2012.
Equities have been neutral to biased to the bearish side for the oil and broader commodity markets over the last several weeks. This week could be a defining week for the short-term direction of equities after the ECB meeting outcome is announced, as well as the US jobs picture.
On the oil front, prices are continuing to pick up where they left off last week...in positive territory. Market participants are becoming more convinced that there will be widespread stimulus from the US, China, and even Europe in conjunction with its potential new bond buying program.
The latest PMI out of China over the weekend was bearish in that it came in below expectations and below the previous months, as the energy-sensitive manufacturing sector in China continues to contract. The market is expecting more aggressive easing from China, but I must admit I do not think it is a sure thing. Even with the lower than expected PMI data, China's economy is still expected to grow between 7% and 8% this year. That is within the broad objectives the government set earlier in the year. Thus, the market could be disappointed.
On the storm front, there are no new tropical storms that could impact the oil and nat gas region in the US Gulf at the moment. The energy industry is currently in restart mode, with about 800,000 bpd or 58% of Gulf crude oil production still shut in, and 39% of nat gas production still shut as of yesterday afternoon.
This is an ongoing process, and I am still expecting producing operations to return to normal within the next week. Refineries are restarting and logistics are also close to normal, with LOOP back to normal operations as of September 1.
This week's oil inventory report could likely be a primary price catalyst, especially if the actual outcome shows a large decline as projected due to Hurricane Isaac in the Gulf of Mexico. This will be a reminder report that even a hurricane that results in only preemptive shut downs will still have a significant impact on supply and thus inventory levels.
I am expecting the US refining sector to throttle back runs this week...a result of the preemptive shutdowns ahead of Isaac. I am expecting a significant draw in crude oil inventories, a draw in gasoline, and a large draw in distillate fuel stocks, all related to Isaac.
I am expecting crude oil stocks to decrease by about 11.5 million barrels. If the actual numbers are in sync with my projections, the year-over-year surplus of crude oil will now show a small deficit of 0.1 million barrels, while the overhang versus the five-year average for the same week will come in around 16.2 million barrels.
I am expecting a modest draw in crude oil stocks in Cushing, Oklahoma, as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term, which is now trading over the $19 a barrel premium to Brent level. I am still of the view that the spread will continue the process of normalization over the next six months.
With refinery runs expected to decrease by 6%, I am expecting a large draw in gasoline stocks. Gasoline stocks are expected to decrease by 5.5 million barrels, which would result in the gasoline year-over-year deficit coming in around 13.1 million barrels, while the deficit versus the five-year average for the same week will come in around 9.6 million barrels.
Distillate fuel is projected to decrease by 3 million barrels. If the actual EIA data is in sync with my distillate fuel projection, inventories versus last year will likely now be about 33.7 million barrels below last year, while the deficit versus the five-year average will come in around 29.1 million barrels. Exports of distillate fuel during the storm were likely held back.
I still think the oil price is overvalued and toppy at current levels, as it approaches a key technical resistance area. WTI is still currently in a $90 to $100 per barrel trading range, while Brent is in a $110 to $120 trading range. That said, this week prices will be impacted by the weekly inventory report, as well as by the outcome of the ECB meeting and the growing view that more stimulus from both China and the US is on the way.
I am keeping my view at neutral, with a bias to the bullish side, until more clarity emerges from Isaac insofar as restarting nat gas operations. The warm weather is also returning, and could support prices in the short term.
The combination of the impact of Isaac and warm weather is likely to result in the upcoming injections continuing to underperform history, and thus result in the overhang of nat gas in inventory continuing to narrow as it has been for the vast majority of the injection season to date.
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