Alan's Finance Blog

Oil Price Drops Despite Draw in Crude Stocks. Investors Worry About Fuel Demands

Crude inventory drew -0.98 mmb, compared with consensus of +2 mmb increase, to 337.4 mmb in the week ended October 2.Cushing also dropped -1.41 mmb. However, fuel stockpiles gained with gasoline stock building +2.94 mmb to 214.4 mmb and distillate stock rising +0.68 mmb.

WTI crude oil retreats after the report. Currently trading at 70.6, investors remain concerned about the demand outlook. RBOB gasoline price slides to 1.75 while heating oil plunges to 1.81.

US Oil Inventory

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Crude Oil Price Weakens as Investors Take Profits Ahead of US Employment Data

Crude oil price retreats below 70 as investors take profit ahead of the US employment report. Indicators released earlier this week have been rather mixed and ‘employment’ components have surprised to the downside. Falls in stock markets and advance in USD indicate reduction in risk appetite.

Consensus forecast the number of payrolls probably dropped -187K in September after a -216K decline in the prior month. Unemployment should have risen to 9.8% from 9.7%. Indeed, several market participants (i.e. investment banks) have revised down their estimates after the disappointing ISM manufacturing data, Challenger employment and ADP employment change.

The employment component of the ISM manufacturing index dropped -0.2 points to 46.2, indicating no much improvement from the -63K drop (August) in manufacturing payrolls in September. In a report by the Confederation Board, consumer confidence index fell to 53.1 from 54.1. Meanwhile the labor differential, the % of people thinking jobs are plentiful vs the % of people thinking jobs are hard to get, widened to -43.6 from -40 in August. This suggested the outlook on job market remains weak.

ADP showed that employment plunged -254K in September, compared with consensus of -195K, from a revised -277K in August. Challenger jobs sank -30.2% yoy in September after a -13.8% decline a month ago.

Stock markets plummet in both Asian and European sessions. UK’s FTSE 100 Index opens lower and is currently dropping -1% to 4998. Germany’s DAX and France’s CAC 40 also falling -0.7% and -1.2% respectively. In Asia, the MSCI Asia Pacific Index slid -2.1% while Japan’s Nikkei 225 Stock Average dropped -2.5%.

Natural gas for November delivery remains under pressure after dropping -7.8% to settle at 4.466 Thursday after the US Energy Department reported gas storage increased +64 bcf to 3589 bcf in the week ended September 25. At current level gas inventory has set a new record high by exceeding the peak level of 3545 bcf in November 2007.

Gold price continues to trade below 1000 as USD strengthens further. Others in the precious metal complex also weaken with silver sliding for the second consecutive day, losing another -1.3% to 16.2 and platinum dropping another -1% to 1275.

US auto sales plunged -23% to an annualized rate of 9.22M in September, suggesting pullback in sales after the government’s ‘cash to clunker’ rebate program.

Oil Price Has Little Change Depsite IMF’s Upgrades

Hovering around 70, the benchmark contract for crude oil changes little ahead of US opening. IMF’s upgrades on economic forecasts and OPEC’s production cut in September are bullish factors but investors probably feel nervous to push oil higher after the +5.8% rally yesterday.

IMF forecasts world economy will expand +3.1% in 2010, compared with +3.1% projected in July, as driven by growths of +9% and +6.4% in China and India respectively. As stated in the report, ‘the recovery has started and financial markets are healing…’in most countries, growth will be positive for the rest of the year, as well as in 2010′. However, ‘to sustain the recovery, private consumption and investment will have to strengthen as high public spending and large fiscal deficits are unwound’.

For OECDs, GDP in the US, Japan and the Eurozone are anticipated to rise by +1.5%, +1.7% and +0.3%. All of these estimates have been revised upward from Julys’ projections.

According to Bloomberg’s estimates, OPEC’s crude production declined 50K bpd from August to 28.395M bpd in September as led by reductions in Iraq, Saudi Arabia and Angola. For the 11 members (excluding Iraq) that are subject to quota, total output dropped -10K bpd to 26.045M bpd in September, though the production was still higher than the target.

Stock market plunges in both Europe and Asia. In the UK FTSE 100 Index slides -0.6% to 5106 as investors worry that equity rally in recent months has overextended. The benchmark index for British stocks soared +21% in 3Q09, the strongest quarterly rally since 1984. However, macroeconomic data do not seem to justify the surge. Released earlier, manufacturing PMI slipped to 49.5 in September from 49.7 in the prior month. The market had anticipated an improvement to 50.2. Germany’s DAX and France’s CAC 40 also lost ground after the 16-nation Eurozone recorded an unemployment rate of 9.6% in August.

In Asian session, the MSCI Asia Pacific Index slid -1.2% after rising for 3 days. In Japan, the Nikkei 225 Stock Average dropped -1.5% to 9978.6, the first close below 1000 in 2 months as the Tankan survey factored in bigger capex reduction in the year ended March 2010.

While staying above 1000, the benchmark contract for gold retreats to 1004.5 as the euro erases previous gains and sinks to 1.453. ECB President Trichet said, before the G-7 meeting, that ‘there is very strong sentiment that we have a shared interest in a strong international financial system and ‘excess volatility may have adverse implications’. The comment hinders further buying of the single currency as the central bank president seems to prefer a stronger dollar.

Strengthening in WTI Timespread Signals Further Draws in Cushing Stocks

Crude oil rallied +5.8% to settle at 70.61 Wednesday as gasoline stockpile surprisingly drew last week. Although the inventory data were mixed with crude inventory rising more than forecasts while distillate gaining modestly and gasoline drawing, the market rose higher.WTI time-spread’s strengthening signals more draw at Cushing is underway. Others in the energy complex also surged with gasoline jumping +6% to 1.73 and heating oil adding +5.6% to 1.8.

Crude oil inventory increased +2.8 mmb to 338.4 mmb in the week ended September 25 with most of the builds coming from the Gulf Coast and the West Coast (+4.1 mmb in total). The builds was partly offset by the draw in the Midwest where the Cushing stock declined -1.5 mmb. As expected, refinery runs dropped and should continue to head lower in coming weeks during the ‘transitional period’ between peak driving season and winter heating season.
Gasoline stockpile drew -1.66 mmb to 211.5 mmb as gasoline demand rose strongly by +3.8% on weekly basis to 8.73M bpd. Distillate stockpile increased +0.32 mmb to 171.1 mmb. Despite the build, it’s the smallest increase recorded in the past 3 months. Demand rose +3.2% on weekly basis to 3.41M bpd. However, it remained well below the consumption recorded last year while the 4-week average still stayed below historical average.

The benchmark contract for oil pulls back to around 70 in Asian session today as stock markets retreat. The MSCI Asia Pacific Index loses -1.1%. In Japan, the Nikkei 225 Stock Average drops -1.6% to 9967 after BOJ’s Tankan survey. Although headline business condition DIs improved in the third quarter, the report showed that capex will drop -10.8% in the year to March 2010, compared with a decline of -9.4% previously projected.

We will have a series of data to be released today. In the Eurozone, the unemployment rate probably rose to 9.6% in August from 9.5% in the prior month. Although the PMI in August suggested that companies’ intention to employ has improved, it takes time to feed into the real economy. In the US, personal income is expected to have edged +0.1% higher while personal spending rising +1.1% in August, making a third consecutive decline in saving rates. The core PCE index should have gained another +0.1% during the month. ISM manufacturing should have risen to 54 in September from 52.9 a month ago. Employment data including Challenger job cuts and the weekly initial jobless claims will also be released today.

Gold price surged +1.5% to close at 1009.3 amid USD’s weakness. Others in the precious metal complex also jumped. Silver rallied +3% to 16.66 and platinum gained +1.9% to 1302.9. According to IMF, USD’s share in global currency reserves fell to 62.8% in 2Q09 from 65% in the previous quarter. Euro’s share, on the other hand, rose to 27.5% from 25.9%. This is evidence showing USD’s status as the dominant reserve currency is threatened. Gold will be a beneficiary should central bankers continue to diversify away from the dollar.

Crude Oil Price Reacted Mildly Positive to Less-than-expected Distiallte Stock Gain

Crude oil inventory rose +2.8 mmb, compared with consensus of +2 mmb increase, to 338.4 mmb in the week ended September 29. The good thing is Cushing stock recorded significant drop of -1.5 mmb.

Situation in oil product stockpiles was better than previously anticipated. Gasoline inventory drew -1.66 mmb while distillate inventory gained only +0.32 mmb. Both readings beat market expectations.

WTI crude oil price changes little after the report, only edging slightly higher to 67.5 from 66.5 before the release. Investors probably need to gauge the implications of a higher crude build with lower distillate build.

Heating oil bounces to 1.71 while RBOB gasoline rises to 1.65 after the report.

Lack of positive response from investors was also driven by disappointing US employment data and Chicago PMI. ADP reported -254K decline in employment in September following a -277K drop in the prior month. The market had expected a decline of only -195K. Chicago PMI slid to 46.1 in September after reaching the expansionary territory of 50 a month ago.

US Oil Inventory

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Oil Fell amid Weaker-than-expected Eco Data and Inventory Builds

The energy complex ended the day with mixed performance. WTI crude oil rose to as high as 67.3 before pulling back and settling at 66.71, -0.2% as US consumer confidence index was worse than expected. The API inventory report showing crude builds further depressed oil price. For product prices, heating oil added +0.6% to 1.7 while RBOB gasoline dropped -0.6% to 1.63.

US consumer confidence index by the Confederation fell to 53.1 in September from 54.5 in the prior month as the employment situation remained poor. The labor market differential dropped to -43.6% in September from -40% in August. The measure represents the difference between the proportion of people saying jobs are plentiful has and the proportion of people saying jobs are difficult to find and the more negative the figure points to a worse job market. Historically, a decline in the difference signaled an increase in unemployment rate.

Stock markets in the US ended the day lower despite brief rebounds in early morning. Dow Jones Industrial Average slid -0.5% to 9742. S&P 500 Index fluctuated between gains and losses but eventually lost -0.2% to 1061.
After market close, the industry-sponsored API reported that crude oil inventory increased +2.76 mmb, compared with consensus of +1.21 mmb, to 340 mmb in the week ended September 25. The build was driven by surged in imports together with decline in refinery runs. Gasoline stockpile unexpected dropped -1.72 mmb (consensus: +0.84 mmb) to 212.5 mmb as demand rebounded. As usual, distillate stockpile gained, by 2.29 mmb last week, to170.7 mmb.

In the oil report to be released in US session today, the US Energy Department will probably show crude inventory built +2 mmb while gasoline and distillate stockpiles rose +1 mmb and +1.2 mmb respectively.

Gold price fell to as low as 984.7 yesterday amid USD’s strength. However price recovered and closed at 993.1, +0.1% for the day. However, others in the precious metal complex slipped with silver losing and platinum losing -0.1% and -1% respectively.

US Oil Inventory

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

Source: Oil n Gold

Escalated Tensions in the Middle East Lifted Oil Price

Despite weakness in Asian session, crude oil price rebounded later in the day as Iran’s missile tests might have escalated geopolitical tensions. Moreover, strength in stock markets also boosted commodities. WTI crude oil gained +1.2% to close at 66.84 while Brent crude edged +0.7% higher to65.54. Fuel price also recovered in sympathy with RBOB gasoline gaining +1.1% to 1.64 and heating adding +0.8% to 1.69.

Last week, Iran’s announcement that it has been building a second plant for enriching uranium drew attention of the UN and the world. The US, UK and France said that the deed is in violation of the nuclear non-proliferation treaty. A meeting has been scheduled on October 1 between Iran, and the US and European officials regarding the issue. However, the Iranian government carried out missile test yesterday and test-tired a Shahab-3 missile. The act must have worsened the relationship between Iran and the UN and more sanctions are anticipated.

Stock markets strengthened in the US amid the M&A theme. Dow Jones Industrial Average rose +1.3% to 9789 while S&P 500 Index gained +1.8% to 1063. Xerox agreed to buy Affiliated Computer Services for $6.4B while Abbott Lab planned to buy Solvay’s pharmaceutical units. Financial stocks also surged +3.4% while insurers gained +5%. In Europe, Germany’s DAXC rallied +2.8% on election result.

Today in Asia, stocks also climb higher as driven by oil and tech stocks. The MSCI Asia Pacific Index adds +0.4% and Japan’s Nikkei 225 Stock Average rises +0.6% to 10072.

The precious metal complex ended the day slightly higher despite USD’s rebound. Robert Zeollick, World Bank President, commented that there are other options for the world’s reserve currency and USD should not take the status for granted. Although USD ‘is and will remain a major currency, the greenback’s fortunes will depend heavily on US’ choices on inflation, the budget deficit and financial oversight’. The speech posed threat to the dollar and helped gold.

USD rebounded against major currencies after falling sharply in the previous week. Against the yen, USD initially plummeted to as low as 88.25 but then pared most of the losses after Japan’s finance minister said that he did not favor a stronger yen and would not rule out intervention. Against the euro, the greenback closed +0.6% higher as ECB president Trichet said that a strong dollar is ‘extremely important to global economy.

Crude Oil Stays Weak. It’s Correlation with USD Has Surged Substantially

Crude oil price falls below 66 in European morning as USD recovers and stock markets weakens. Currently trading at 65.5, the benchmark contract for crude oil is vulnerable to further decline as investors worry about demand outlook, with distillate consumption the weakest link.

While all of us are familiar with the inverse correlation between gold and USD, the dollar is in fact negatively correlated with all commodities as they are denominated in USD. Although gold traditionally had the strongest relationship with USD, it’s ‘status’ has been overtaken by crude oil in September. This probably suggests crude oil, rather than gold, has greater appeal to investors as they seek higher risk-higher yields. Although gold price has been treated as a financial product, rather than a commodity, weak physical demand and IMF gold sales (although we do not expect significant real impact to price) have posed downside risk to gold’s rally especially when price has approached record high level.

In the weekly report, we mentioned that distillate demand has been very weak despite improvements in economic data. At the same time, given the huge distillate inventory, refiners will delay/ slow down distillate production although we are entering winter. It’s true that distillate demand should remain weak in the near-term. But, how about in the long-term? Will distillate demand catch up with global economic recovery? Yes, we think so.

US imports are critical to distillate demand. In recent months, ‘new orders’ component in ISM survey surged to 55.3 in July and then 64.9 in August. This signaled potential turnaround in the inventory cycle. Should businesses in the US re-stock, there’s potential for distillate demand to pick up again.

Gold price changes little in European morning. Currently trading at 992.5, the yellow metal may halt a 3-day decline last week. However, as gold price had been so strong (having surged for 5 consecutive weeks from mid-August to mid-September) in the past month, further weakness cannot be ruled out and price may hover below 1000 for some time before uptrend resumes.

Stock performance in Europe is mixed. While both UK’s FTSE 100 Index and France’s CAC 40 Index slide -0.1-0.2% in morning session, Germany’s DAX Index edges slightly higher (+0.8%) after Merkel, German Chancellor, won enough votes to form the next government.

In Asia, the MSCI Asia Pacific Index lost -1.6% with Japan’s Nikkei 225 Stock Average plunging -2.5%. In China, the Shangha Composite Index dropped -2.7%.

Source: Oil n Gold