Crude Oil

Crude Oil Market

Slightly positive news from Europe on Wednesday and a huge draw reported in the latest EIA weekly oil inventories report were enough to move oil prices higher and WTI one step closer to the triple digit price level. The large draw was viewed as modestly bullish since a good portion of the draw was likely related to end-of-the-year LIFO inventory adjustments. With few important comments or news snippets hitting the media airwaves over the next week or so (due to the holidays), many risk asset markets could experience a continuation of the short covering rally started a few days ago.

The ongoing story of Iran and the broader Middle East (including Iraq now that the U.S. military is gone) will continue to act a put in the oil market with exposure for price spikes at any time. The geopolitics of the region will once again be on the radar and will from time to time act as the main price driver for the oil complex. There are enough geopolitical events evolving in Iran, Iraq, Egypt, Syria, Kazakhstan and Nigeria to suggest that over the medium, term supply issues could emerge. The most active at the moment are the protests in a major oil city in Kazakhstan that could impact oil flow and exports from that area while a major Shell pipeline spill in Nigeria has cut production of a 200,000 bpd export flow.

Weekly EIA Oil Inventories Report

The inventory report showed a modest build in total stocks, an as-expected build in distillate inventories, along with a huge build in gasoline stocks as implied demand was higher while refinery utilization rates declined strongly on the week to 85.1% of capacity a decrease of 2.6% in refinery run rates. The data are summarized in the following table along with a comparison to last year and the five year average for the same week.

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Total commercial stocks of crude oil and refined products decreased strongly on the week by 18.2 million barrels. The year-over-year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 38th week in a row. The year-over-year deficit widened to 41.3 million barrels while the overhang versus the five-year average for the same week came in around 5.1 million barrels.

Crude oil inventories decreased versus an expectation for a much smaller draw with a major decrease in PADD 3. With a decrease in stocks this week, the crude oil inventory status versus last year is still showing a wide deficit of around 17.1 million barrels while the surplus versus the five-year average for the same week narrowed to around 1.5 million barrels. PADD 2 stocks increased by 0.8 million barrels on the week while Cushing stocks declined by about 1 million barrels. Crude oil inventories in this region of the U.S. have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI price spread was trading at significantly lower levels. The price spread continues to trade in a trading range of between $9 to $11.50/bbl premium to Brent.

Distillate stocks decreased versus an expectation for a modest build. Heating oil/diesel stocks decreased by 2.4 million barrels as exports seemed to increase on the week. The year-over-year deficit widened to 21.6 million barrels while the five-year average deficit widened to about 4.3 million barrels.  With the economics and demand still likely to hold outside the U.S. and unless the upcoming winter heating season comes in much colder than any of the expectations, the current level of exports will likely continue.

Gasoline inventories decreased modestly on the week versus an expectation for a modest build. Total gasoline stocks decreased by about 0.4 million barrels on the week versus an expectation for a build of about 1.0 million barrels. The surplus versus last year came in at 1.2 million barrels while the surplus versus the five-year average for the same week narrowed to about 8.9 million barrels.

Weekly Oil Inventories Report

The API data released yesterday evening showed across the board draws. The API reported a large draw in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 4.6 million barrels, as crude oil imports decreased and refinery run rates also decreased by 2.1%. The API reported basically small draw in gasoline stocks versus projections for a modest build and a larger-than-expected draw in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline with a small draw in distillate fuel inventories this week. The report is somewhat bullish for the entire complex.

It is difficult to differentiate whether the price gains overnight were from the inventory report, or from the falling U.S. dollar and positives out of Europe. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver.

The more widely watched EIA data will be released this morning.  Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today. Finally keep in mind that the large variations from the expectations are likely related to the industry starting to adjust their inventories for LIFO accounting purposes.

Crude Oil Commentary

Light crude oil for January delivery on the NYMEX settled and expired up $3.34 at $97.22/bbl. February 2012 now becomes the near month. Below are the progressive prices for January 2012 on the NYMEX.

Oil futures prices jumped in early trading Tuesday along with equity markets after the latest report on U.S. housing starts showed home building surging well past expectations, in a positive sign for the U.S. economic recovery. The Commerce Department said housing starts increased 9.3% to a seasonally adjusted annual rate of 685,000, the highest level in 19 months. Economists expected a rise of 0.3%. Stocks rose as the market opened, with the Dow Jones Industrial Average rocketing 149 points in the first minute of trading.

The market was also watching news of unrest in an oil-producing province of Kazakhstan and a meeting of world leaders in Rome to consider sanctions on Iran’s oil exports. In Kazakhstan, the government declared a state of emergency in the Caspian oil town of Zhanaozen after clashes between laid-off oil workers and security forces during an anti-government protest. Kazakhstan exported 1.5 million barrels of oil a day in 2010.

In Rome, leaders of 11 nations including the U.S. and Saudi Arabia are meeting to discuss sanctions of Iranian oil exports. Iran is the second-largest exporter of crude in the Organization of Petroleum Exporting Countries, supplying 2.5 million barrels per day to the world.

Crude Oil Inventories Report

Oil remains mostly coupled to the direction of the U.S. dollar and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background, which does not seem like it will happen anytime soon. As such it is uncertain if many market participants are going to pay much attention to this week’s round of oil inventories data as Europe and the U.S. are still in the midst of uncertainty, suggesting that this week’s oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the tick-by-tick direction of equities and the U.S. dollar (driven by Europe), as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. The normal weekly reports get underway this afternoon when the API data will be released, followed by the more widely watched EIA data on Wednesday morning.

Projections for this week’s inventory reports are summarized in the following table. We can expect:

  • Mixed inventory data with a small increase in refinery utilization rates, which should result in a neutral weekly report
  • A modest draw in crude oil stocks with an increase in refinery utilization rates
  • A modest build in gasoline inventories and only a small draw in distillate fuel stocks as winter weather has still not arrived in most parts of the U.S., especially the large heating oil market along the north east.

If the reported numbers are in sync with projections, the year-over-year deficit of crude oil will narrow to about 8.2 million barrels while the overhang versus the five-year average for the same week will come in around 10.4 million barrels.

Natural Gas and Crude Oil Market Outlook

The natural gas market is maintaining its view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five-year average is going to get harder to work off until we see cold over a major portion of the U.S.  For the medium term, it is uncertain if natural gas will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.

Although WTI crude oil is trading near the key technical support level of the mid- $94’s/bbl, the market broke down last week and the market has downgraded its crude oil view and bias at cautiously bearish for the short term.

Earlier risk asset prices were mixed, as shown on the chart below.

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Crude Oil Market

Oil prices have declined strongly this week and are likely to end the week with the second weekly decline in a row.  As of this writing, the near term NYMEX WTI contract is down by over $5/bbl for the week with the trading pattern looking like it is going to set into a $90 to $100/bbl trading range. Barring any new geopolitical risks, it does not appear WTI will breach the $100/bbl level.  On the other hand, unless the macroeconomic data out of China and the U.S. take a turn for the worse, we are not likely to see oil prices dropping below the $90/bbl market.  The Brent/WTI price spread has also been range bound throughout the sell-off over the last two weeks.  With new weather issues in the North Sea, it does not look like the price spread is going to tighten much over the short term.

Although WTI is still trading above the key technical support level of the mid- $94’s/bbl the market has completely broken down as it did breach this level yesterday. I am not sure whether or not prices are going to hold the $94/bbl level after yesterday’s strong sell-off.  As such I will maintain my view and bias at cautiously bearish for the short term.

Crude Oil Commentary

Oil prices fluctuated near the lowest level in more than five weeks as industrial production in the U.S. unexpectedly fell in November. The NYMEX light crude oil price for January delivery on the NYMEX January futures price settled down $1.08 at $93.87/bbl today after U.S. jobless claims unexpectedly declined and manufacturing in the New York region expanded. Prices tumbled 5.2% yesterday, the biggest one-day drop since September.
Drilling rigs in the U.S. are increasingly being directed toward oil and liquids drilling, favoring the higher-cost liquids markets over the weakly priced natural gas markets, but the trend is as of yet providing no signs of support for natural gas price recovery.

Since peaking at 2,023 rigs operating in the U.S. in the week to Oct. 14, the U.S. rotary rig count fell to 1,987 rigs in the week to Dec. 9. Of the total rigs in operation, 41.3% were directed toward natural gas drilling, down from the 46.3% when gas rigs stood at their highest level of 936 rigs.

With only 820 rigs directed toward natural gas in the week to Dec. 9, after steady and substantial weekly losses from Nov. 4 through early December, the anticipation of lost production would present itself as a bullish market signal. However, despite the falling rig count, natural gas prices have fallen sharply from Nov. 4 through Dec. 9 and further through Dec. 14, when the contract fell to a low of $3.155/MMBtu, a level not seen since September 2009.

The pull toward liquids drilling and away from natural gas drilling is in major part the result of the low economic incentive to drill natural gas amid the weak prices, while prices for crude oil and consequently residual liquids remain strong.