Oil spreads driven lower as geopolitical events cool

January 15, 2014 04:44 AM

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Oil prices (NYMEX:CLG14) are mixed heading into this morning’s EIA oil inventory report. WTI is showing the very early signs of starting to form a technical bottom while Brent is still clearly in a downtrend as the spot contract breached the $106/bbl level in overnight trading with the current price trading either side of this level. RBOB (NYMEX:RBG14) also is moving lower after another larger than expected build in gasoline stocks reported in the API inventory report late yesterday afternoon. Heating oil is starting to show signs of stability as the market is looking at last week’s colder than normal temperatures are starting to reverse the builds in distillate fuel over the last month or so.

Oil prices… especially Brent… are being driven by an easing of the major geopolitical events in the MENA region. Libyan production is continuing to hold steady around the 650,000 bpd level for the last several weeks suggesting that some level of stability may finally be coming to the oil sector in Libya. In addition, market participants are viewing the progress made so far between the West and Iran on Iran’s nuclear program as promising and something that could lead to additional oil exports coming out of Iran sometime this year and possibly as early as the first half of 2014.

The view that the geopolitical risk is easing is having an impact on the Brent/WTI spread with the Brent side of the equation the primary short term price driver over the last week or so. The spread peaked around the $15/bbl level last week and has been narrowing for the last several days with the February spread now once again approaching the $12/bbl support level.

Further impacting the spread is the upcoming start of the Keystone Gulf Cost pipeline that is expected to begin commercial operations on schedule on Jan. 22 (according to TransCanada). Barring any new geopolitical events I would expect the spread to slowly continue to narrow and move back to a single digit premium of Brent over WTI as additional oil moves out of the Cushing area.

Global equities regained their footing yesterday with nine of the 10 bourses in the EMI Global Equity Index gaining ground over the last 24 hours. The Index increased by 0.73% with the year to date loss narrowing to 1.9%. Canada and the three European exchanges are now showing a small gain for 2014 with the remaining exchanges still in negative territory for the year. China continues to hold the bottom spot in the Index. Global equities have been a positive price driver for the oil complex as well as the broader commodity complex over the last twenty four hours. On the other hand, the rising U.S. dollar has offset some of the support coming from the equity sector.

Tuesday's API report was mixed… bullish for crude oil and distillate but bearish for gasoline. Total crude oil stocks decreased strongly and more than the range of projections by the industry. The API reported a large build in gasoline but a draw in distillate fuel after last week’s cold wave. Total inventories of crude oil and refined products decreased slightly on the week.

The oil complex is mixed as of this writing and heading into the EIA oil inventory report to be released at 10:30 AM EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. Crude oil stocks decreased by 4.1 million barrels.  On the week gasoline stocks increased by about 5.4 million barrels while distillate fuel stocks decreased by about 1.7 million barrels.  

The API reported Cushing crude oil stocks increased by 152,000 barrels for the second weekly increase in a row. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is slightly bearish for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil stocks as the restocking process gets underway. I am also expecting a modest build in gasoline inventories and a small draw in distillate fuel on bitterly cold weather last week and as refinery run rates are projected to decrease slightly this week.

I am expecting crude oil stocks to increase by about 1 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 1.4 million barrels while the overhang versus the five year average for the same week will come in around 21.9 million barrels.

I am expecting crude oil inventories in Cushing, Okla. to also show an increase in stock levels for the second week in a row even as Keystone Gulf Coast line fill process is underway. This will be bearish for the Brent/WTI spread this week.

With refinery runs expected to decrease by 0.2% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by 2 million barrels which would result in the gasoline year over year deficit coming in around 6 million barrels while the surplus vs. the five-year average for the same week will come in around 3.6 million barrels.

Distillate fuel is projected to decrease by 0.5 million barrels as exports of distillate fuel out of the US Gulf remains robust and heating demand last week was above normal due to the polar vortex along the east coast. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 7.9 million barrels below last year while the deficit vs. the five-year average will come in around 25.7 million barrels.

The following table compares my projections for this week's report with the change in inventories for the same period last year. As you can see from the table last year's inventories are not in directional sync with the projections. Thus, if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for everything in the complex.

I am maintaining my oil view at neutral and keeping my bias at cautiously bearish for the entire oil complex. The oil complex is continuing to go through a major transition with supplies robust on the U.S. side of the equation and with a slight improvement in the ongoing problems in several international supply locations.

I am maintaining my Nat Gas view at neutral but moving my bias back to neutral as the market sentiment seems to be changing once again and as the spot contract held the $4/mmbtu support level. 

Markets are mixed heading into the US trading session as shown in the following table.

Best Regards,

Dominick A. Chirichella

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