The risk asset markets recovered some of Tuesday's losses when it was first announced that Greece was seeking a referendum on the EU bailout program. The Greek Parliament approved the referendum which is scheduled for mid-December. The Greek Prime Minister has been summoned to France for meetings with the EU leaders ahead of the G20 meeting. The EU cut off financial aid for Greece until a vote on Dec 4th or 5th to determine Greece's status. If the voters do not approve the bailout plan it will be viewed as a vote against staying in the European Union. Needless to say the EU is back to being the number one value drive for all risk asset markets. The above said there is talk this morning in Europe that a possibility exists to avoid the Greek referendum. If that turns out to be true it would certainly be supportive for risk asset markets including oil prices. Keep your seat belts fastened this story is far from over.

Today the G20 meeting opens up around lunchtime in France with Greece the number one topic of discussion. In addition the ECB will announce its policy decision today after its meeting in Frankfurt this morning. The announcement will hit the media airwave in a few hours. The consensus is expecting the ECB to not lower interest rates at this meeting. Yesterday the US Central Bank concluded their next to last FOMC meeting for the year with no new changes in its monetary policy but Bernanke left the door open for additional stimulus if the US economy requires more assistance. The focus of the US Central Bank remains mostly on the high unemployment rate with inflation seemingly under control. In their latest forecast they are expecting a very slow improvement in unemployment with only about a 1% drop over the next two years to 8%. So yes the potential for more QE down the road will be increasing if the employment situation does not improve.

The cloud of uncertainty has certainly widened this week after some promise last week when the EU deal was first put together. Unfortunately everything is back to square one with Greece throwing a huge curveball at the international community and one that does not look like it is going to end very quietly. The whole Greek situation is a mess that will mostly result in a bearish overtone in all of the risk markets including oil until some clear cut outcome is determined.

The uncertainty has had its toll on the global equity markets as shown in the EMI Global Equity Index table below. The Index has now given back more than half of last week's gains and is lower by 3.3% on the week so far. Over the last twenty four hours the results have been mixed. The US Dow is still holding the number one spot and is still in positive territory for the year to date. Seven of the ten bourses in the Index are still showing double digit losses for the year with France now taking over as the worst performer for 2011. Global equities are currently a negative price driver for oil prices as well as the broader commodity complex.
Yesterday's oil inventory report was mixed as crude oil and gasoline stocks built while distillate stocks declined strongly. With the uncertainty surrounding the financial markets (especially in Europe) the fundaments did not play much of a role in price movement on Wednesday. Crude was able to hold onto modest gains throughout all of the US trading session as positive news was emerging from the FOMC meeting insofar as the potential for more stimulus down the road if things do not improve. So far this morning crude oil is hovering around the unchanged level. Gasoline inventories build modestly on the week as implied demand only increased marginally while US refiners remain in a max distillate production mode (at the expense of gasoline). Crude oil did build the most in the complex. That said the build in total commercial stocks of 1.8 million barrels was mostly neutral to bearish but not overly significant.
The market viewed the report as neutral for everything thing other than distillate fuel. The inventory report showed a small build in total stocks, an unexpected build in gasoline and a larger than expected draw in distillate inventories along with a surprisingly modest build in crude oil stocks as implied demand was modestly lower and refinery utilization rates increased on the week to 85.3% of capacity an increase of 0.5% in refinery run rates. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.

Total commercial stocks of crude oil and refined products increased on the week by 1.8 million barrels. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 32nd week in a row. The year over year deficit narrowed to 68 million barrels while the overhang versus the five year average for the same week widened to around 3.4 million barrels.

Crude oil inventories increased more than the expectations. With an increase in stocks this week the crude oil inventory status versus last year is still showing a wider deficit of around 26.7 million barrels while the surplus versus the five year average for the same week widened to around 6.5 million barrels. PADD 2 stocks increased about 1.3 million barrels on the week while Cushing stocks built by about 0.6 million barrels. Crude oil inventories in this region of the US have been in a decline and are still at levels not seen since the middle of 2010 when the Brent/WTI spread was trading at significantly lower levels. That said the spread has stabilized for the last several trading sessions but I am still expecting the spread to continue to slowly narrow over the next several weeks..

Distillate stocks decreased versus an expectation for a smaller decline. Heating oil/diesel stocks decreased by 3.6 million barrels as exports remain robust on the week. The year over year deficit widened to 26.6 million barrels while the five year average overhang deficit also widened to about 6 million barrels. Exports of distillate fuel from the US and in particular from the US Gulf Cost have been steadily growing over the year with the pace of exports accelerating over the last year or so. In fact total distillate fuel exports are still hovering around the 900,000 barrels per day level or almost the equivalent of 25% of US consumption of distillate fuels. With the economics and demand still likely to hold outside the US 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 increased modestly on the week versus an expectation for a draw. Total gasoline stocks increased by about 1.4 million barrels on the week versus an expectation for a draw of about 1.8 million barrels. The deficit versus last year narrowed to 8.7 million barrels while the deficit versus the five year average for the same week narrowed to about 2.6 million barrels.

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 presented a mixed categorization. That said I would rate the overall report as neutral to marginally bearish.
Although WTI still trading above the $91/bbl level I have to maintain my view at neutral with my bias still toward the bearish side of the equation. As discussed above the EU is still a mess while global manufacturing is starting to slow once again. That said WTI is going to have to breech the $90 to $91/bbl level in order for oil to be back in a short term downtrend. For now although I am still on the bearish side I still do not like the risk/reward in the oil market and prefer the sidelines today until all of the news around Europe is digested.
Although I am still bearish I am not expecting Nat Gas prices to fall precipitously over the short term (next few days). However, yesterday's trading session was a bit interesting in that futures prices made a few passes at breaching a key support level which if it is breached over the next several sessions it would put Nat Gas futures back into a mode of possibly testing the 2011 low for the year. I am still keeping my guidance at neutral but moving my bias back to bearish also to see how price activity plays out over the next several trading session. I must say in looking at the fundamentals it is still hard to be anything other than bearish.

Nat Gas futures are spending another trading session mostly in negative territory as there is still little ...if anything to push prices higher. Several times during today's session the spot Nymex contract breached the $3.76/mmbtu support level but was unable to hold below this key level (so far). All of the normal Nat Gas drivers remain biased to the bearish side. The short term weather forecasts out of NOAA are calling for most of the eastern half of the US to experience above normal temperatures for the next several weeks, there is nothing going on in the tropics as the tropical weather season is quickly winding down, supply remains robust and demand is sluggish at best as the shoulder seasons continues to drag on.

The most amazing and interesting thing about the Nat Gas market is its ability to stabilize with the Dec Nymex contract not yet moving down to the lows made during the tenure of the Nov contract. There seems to be significantly less conviction by the bears as the seasons begin to turn. On the other hand the winter bulls are slowly starting to line up and build both their winter spec and hedge position books. That all said the industry will be entering the upcoming winter heating season with total inventories very near (if not above) the all time record high level made last year.

Currently as a new day of trading gets underway in the US markets are mixed as shown in the following table.

Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.