Quote of the Day

Don't hate it's too big a burden to bear
Martin Luther King, Jr.

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The Alaskan pipeline continued to dominate the direction of oil prices along with the release of the latest EIA oil inventory report which was mixed (see below for more details). The pipeline restarted at two -thirds of capacity yesterday while the operator constructs a by-pass around the leaky area of the line. The line will once again be shut down for about 36 hours over the weekend as the by-pass system is connected to the main line. Since the shut down last Saturday about 4.5 to 5 million barrels of production will have been shut-in (through this weekend's scheduled shut-down). A substantial amount of lost oil deliveries but not so much as to have a significant and long lasting impact on the US supply situation as there is still an ample amount of oil in inventory.
The fact that a fundamental event has impacted the price direction of oil is a noticeable change from a year or so ago when oil stocks were at historically high levels and fundamentals issues had no impact on prices. In addition the shut-down of a Chevron rig in the Gulf of Mexico and some problems in the North Sea all combined to push WTI prices to within 10% of the psychological triple digit level of $100/bbl. In fact the spot Brent contract which expires on Friday is currently trading only $1.50/bbl below the $100/bbl mark as of this writing. On the macro basis commodities in general have once again caught the attention of most investor/traders especially after yesterday's very bullish crop report covering the major agricultural markets. More and more it is looking like the entire commodity complex is going to continue in an uptrend as concerns over supply and inflation are starting to move into the forefront. Although there has not been any mad rush into Nat Gas the fact that more cash is seeking commodity risk will at a minimum serve to keep a floor on Nat Gas prices. But the so called commodity risk on trade is certainly on as cash continues to flow into all commodities...including oil but this time it is not simply speculative money it is money coming from the commercial sector as supply concerns mounts for many of the traditional commodities. Even coal prices are now trading at a 28 month high as the flood sin Australia have shut in a significant amount of Australian coal production and exports.
Global equities have added another level of support for commodity prices s they have increased in value for most of this week. The EMI Global Equity Index (table shown below) gained another 1% over the last twenty four hours widening the year to date gain for the Index to 3%. For the first time this year all of the ten bourses in the Index are now in positive territory for 2011. Even Australia and Canada moved into the winners column on the back of rising commodity prices. Equities are supportive for oil prices and the broader commodity complex as is the declining US dollar. The US dollar declined today after another positive Portuguese debt auction.

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Yesterday's inventory report was mixed as both gasoline and distillate fuel inventories built even as refinery utilization rates declined strongly by 1.6%. On the other hand crude oil stocks drew more than expected on the week even as imports increased. The EIA oil inventory report was overall neutral in my view but was bearish for refined product inventories as both gasoline and distillate fuel inventories built more than expected while crude oil stocks declined significantly more than expected (the bullish side). The data is summarized in the following table along with a comparison to last year and the five year average for the same week. Further on the neutral side of my categorization is the fact that total commercial stocks of crude oil and refined products built on the week by 0.9 million barrels. The year over year surplus of total commercial stocks of crude oil and refined products narrowed to 6.9 million barrels while the overhang versus the five year average for the same week widened to 50.2 million barrels. This is the first week of a build in total stocks after fourteenth weeks in a row of declines in total commercial stocks for a reduction of 75.2 million barrels of oil in inventory over the the 14 weeks. Even with this week's build stocks are still 74.4 million barrels below where they were about three months ago. The narrowing trend of the overhang is a very positive sign that the US is following other parts of the global system in a destocking pattern. With winter weather related demand now in play global inventory destocking is likely to continue.

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The unexpectedly modest decline in crude oil inventories of 2.2 million barrels was a major contributor to capping the total commercial stock build. The overhang versus last year narrowed this week to 2.1 million barrels while the surplus versus the five year average narrowed to 18.3 million barrels. PADD 2 and crude oil stocks built once again and are biased to the bearish side on the week (insofar as the WTI/Brent spread).
Distillate stocks built versus an expectation for only a small build resulting in a bearish outcome. Heating oil/diesel stocks built by about 2.7 million barrels versus an expectation for a build of around 0.8 million barrels. All of the distillate inventory build was in the diesel fuel category as colder than normal weather resulted in a modest draw in heating oil. As a result of the underperformance versus expectations HO prices continue to lag crude oil at the moment. That said the year over year has switched to a surplus of 4.4 million barrels while the five year average overhang widened and is now about at 23 million barrels.
Gasoline inventories continued to build increasing by 5.1 million barrels after rising strongly for about the last month or so. The deficit versus last year narrowed to 0.3 million barrels while the surplus versus the five year average widened to 8.8 million barrels. Gasoline stocks are still below last year but are growing versus normal for this time of the year versus the five year average. If the current destocking pattern does not quickly return we could see gasoline inventories returning to a major overhang problem. The bigger than expected build in gasoline stocks is likely related to the massive snow storms that plagued major parts of the US last week and a recovery in demand and subsequent reduction in stocks should occur in next week's data.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have a mixed categorization. This week's report was an overall neutral. We had several weeks of declines in refined products but for the last few weeks inventories built and if this pattern continues it could set the industry back into a bearish pattern for inventories. We can't lose sight of the fact that overall stocks in the US are still above normal and likely to remain at above normal levels for a considerable period of time even if the destocking pattern we are beginning to see continues to evolve over the next several months.

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My individual market views are detailed in the table at the beginning of the newsletter. I have maintained my overall view at neutral but upgraded my bias back to bullish as prices may continue to move toward the $100/bbl once a short term downside correction is in place. We are clearly still in an technical and fundamentally driven longer term uptrend and any significant correction could turn out to be a good entry point as oil prices seem more destined to at least make an attempt at approaching...if not hitting the $100/bbl mark.
I am maintaining my Nat Gas view and bias to neutral as the next phase of winter weather may not turn out to be as severe as originally expected (basis the latest NOAA forecast)). With supply and demand balances still very robust even a return to colder than normal winter weather conditions will not be enough to send prices into surge mode rather we can expect to see prices move toward the high end of the trading range and possibly even breach it. Weather is still the sole contributor to price direction.
Currently most risk asset classes are mixed as shown in the EMI Price Board table below.

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Best Regards,
Dominick A. Chirichella

The daily commentaries provide a recap of each product's traded price activity, an analysis of the factors that influenced price activity, a recap of any reports released that day, and a look ahead at the next day's schedule. CME Group provides market commentaries for corn, wheat, soybeans, gold, silver, FX, equity indexes and regional market updates.

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