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.

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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.

Weekly Oil Inventories Reports

The API data yesterday showed across the board builds. The API reported a small build in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 0.5 million barrels as crude oil imports increased and refinery run rates also decreased by 1.4%. The API reported basically no change in gasoline stocks versus projections for a modest build and an expected build in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline and distillate fuel inventories this week. The report is somewhat bearish for the entire complex. The report has resulted in selling in the market overnight. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week, with inventory data a secondary driver. The API reported a build of about 0.5 million barrels of crude oil with a 0.1 million barrel build in Cushing and a build of about 1 million barrels in PADD 2. This is bullish for the Brent/WTI price spread, which has been somewhat range bound since the middle of November. On the week, gasoline stocks were about unchanged while distillate fuel stocks built by about 1.2 million barrels.

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.

Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background. 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. As such this week’s oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report.

Crude Oil Commentary

Crude futures were treading water in early trading Tuesday, after recovering from Monday’s loss overnight.  Light, sweet crude for January delivery on the NYMEX settled up $2.37 at $100.14/bbl.

Crude oil prices elevated as the euro gained and the dollar fell. The euro zone’s sovereign-debt crisis has weighed heavily on the market for several weeks. Oil futures often trade inversely to the dollar, as the dollar-denominated commodity becomes more expensive for holders of other currencies.

There were several reports seemingly important to the oil market, though little seemed to gain traction, from Iran’s military exercises in the Strait of Hormuz, a key Middle East oil shipping channel, to OPEC reducing its forecast for 2012 crude demand, citing the potential for global economic decline. The International Energy Agency also lowered forecasts slightly for 2012 demand, citing economic worries.

Meanwhile, U.S. November retail sales grew less than expected, signaling a weak start to the holiday shopping season.

Global equities pulled back after a Dow Jones report said that German Chancellor Angela Merkel has rejected suggestions to raise the funding limit for the European Stability Mechanism, or ESM, which currently stands at €500 billion. The fund goes into effect next year and may run alongside the €440 billion European Financial Stability Facility.

Crude Oil Market

The International Energy Agency (IEA) released its monthly oil report this morning. As expected and as the EIA did, they lowered their forecast for oil demand growth versus last month’s report. They lowered their forecast for 2012 oil demand growth by 200,000 bpd compared to the November report. Following are the main highlights from the report. OPEC will also be releasing its report today one day ahead of the OPEC meeting.

Crude futures prices moved higher in November and early-December on seasonal demand strength and tight supply. Bullish impetus also came from news of a potential EU ban on Iranian crude imports. These factors outweighed escalating economic risks, but resulted in uneven price gains among the key benchmarks. At writing, Brent stood near $107/bbl, with WTI around $98/bbl.

  • A more precarious economic backdrop and weaker 4Q11 data – particularly for OECD Europe – curb oil demand projections for 2011 and 2012 by around 0.2 mb/d. Global oil demand is expected to average 89.0 mb/d by 2011, a rise of 0.7 mb/d on 2010, before gaining a further 1.3 mb/d in 2012 to reach 90.3 mb/d.
  • Global oil supply rose by 0.9 mb/d to 90.0 mb/d in November from October, driven by lower non-OPEC supply outages. A yearly comparison shows similar growth, with OPEC supplies standing well above year-ago levels. Non-OPEC supply growth averages 0.1 mb/d for 2011 but rebounds to 1.0 mb/d in 2012, with strong gains expected from the Americas.
  • OPEC crude oil supply in November rose to the highest level in more than three years, up by 620 kb/d to 30.68 mb/d, with Saudi Arabia and Libya accounting for 80% of the increase. OPEC ministers will meet on 14 December in Vienna to review the market outlook. The ‘call on OPEC crude and stock change’ for 2012 stands at 30.2 mb/d, near recent OPEC output levels.
  • Global refinery crude throughputs fell by close to 1 mb/d in October, as OECD autumn maintenance hit its seasonal peak and Chinese runs remained weak. Preliminary data show runs rebounding sharply in November, despite poor margins, to meet higher winter demand. 4Q11 estimates are largely unchanged at 75.1 mb/d, rising to 75.8 mb/d in 1Q12.
  • OECD industry oil stocks declined in October by a steep 36.3 mb to 2 630 mb, or 57.2 days of forward cover. The inventory deficit versus the five-year average widened to 61.9 mb, from 40.0 mb in September, and crude and middle distillates dominated the October decline. November preliminary data show a counter-seasonal, 6.9 mb build in OECD industry stocks.
  • Updated medium-term projections show global oil demand rising from 88.3 mb/d in 2010 to 95.0 mb/d in 2016, growth of 1.1 mb/d per year on average. A stronger global liquids supply outlook now sees upstream capacity attain 101.5 mb/d by 2016, average yearly growth of 1.3 mb/d, with the outlook for Iraq, Libya and the Americas stronger than in June. Meanwhile, global crude distillation capacity additions for 2010-2016 are trimmed by 0.9 mb/d, but remain a substantial 8.7 mb/d.

Natural Gas Commentary

January natural gas futures were lower Monday, Dec. 12, fading to a $3.218/MMBtu session low and trading only as high as $3.271/MMBtu in early trade, the near month contract settled down $0.063 at $3.254/MMBtu as weather forecasts were revised to include milder conditions that could support a steady widening of the five-year-average storage overhang. Technical support for January natural gas is seen at $3.25, $3.00, $2.75 and $2.50 while resistance is marked near $3.50, $3.75, $4.00, $4.25, $4.50 and $4.75/MMBtu.

The market remains depressed by healthy storage and lackluster demand as traders were greeted in the new week by revised weather outlooks showing the eastern U.S. and a portion of the central region will see above-average temperatures through the upcoming 14-day period.

Hand-in-hand with mild weather, demand is seen only ticking higher driving storage levels down modestly and at a rate below both year-ago and five-year average pulls allowing more natural gas to stay in storage, providing little support for price advance.

Early projections for the U.S. Energy Information Administration’s Dec. 15 storage report covering the week ended Dec. 9, suggest a range of pulls from the upper 80s Bcf to the low 90s Bcf, comparing bearishly to a 142-Bcf five-year average pull and a drawdown of 154 Bcf reported for the same week a year ago. The drawdown would follow a similarly bearish 20-Bcf withdrawal in the week to Dec. 2 that left stocks at 3,821 Bcf, widening the overhang to the five-year average to 307 Bcf.

While storage and the delayed start of cold winter weather in key heat consuming regions drives lower the price of natural gas. The market is also watching a steady decline in natural gas directed rig counts and looking to some indication that the fewer number of rigs searching for natural gas will begin to impede production figures. Baker Hughes Inc. reported that for the week ended Dec. 9, natural gas rigs dropped 36, and now stand at 820, 128 rigs lower than last year’s count.

Additionally, on the production side, early winter production freeze-offs were reported mainly in the West over the report period ended Dec. 7, covered in the EIA’s latest “Natural Gas Weekly Update” issued Dec. 8. The EIA reported San Juan basin production fell 400 MMcf on Monday, Dec. 5, with most of the production recovered Dec. 6. “The production shortfalls this week were relatively minor compared to other major freeze-offs that have occurred in the past,” the EIA said.

While production begins to take some hits, consumption rates are rising despite the overall mild weather across the bulk of the country. The EIA reported domestic consumption rose 18.4% for the week covered in its Dec. 8 report. The largest gains came from the residential and commercial sectors, as well as the electric power sector, according to data.

Day-ahead, spot markets prices were also lower post-weekend, extending losses from the Friday session as the market assessed the revised weather outlooks and lower demand requirements on regional power grids and moved the market down accordingly. Deals at the benchmark Henry Hub were done from the upper $3.00s to $3.10s, off a sharp $.16 in deals done for Tuesday, Dec. 13, delivery with additional pressure from futures’ weakness. In the Northeast, Transco Zone 6 NY traded off an even more impressive $.34 in deals that spanned the $3.40s to $3.60/MMBtu as weather drives demand down.