The oil complex is very much back to two different worlds as WTI continues to drift lower while Brent remains firm amidst the evolving geopolitical events in the Middle East. The Brent/WTI spread has blown out over the last several trading sessions with the spread currently trading close to $20/bbl premium Brent over WTI. Brent is being driven by what is going on with Iran and the potential for an interruption of supply of Iranian crude oil to Europe coupled with a return of winter with a vengeance in parts of Europe which is quickly increasing the demand for gasoil. On the other hand the view that both PADD 2 and Cushing crude oil stocks are likely to grow back to a surplus condition is putting pressure on WTI.

In addition the external price drivers...direction of the euro & USD and equity markets are impacting the direction of WTI and not so much Brent. Oil has a different face depending on what commodity in the oil complex one looks at. For the moment all that is bullish is being reflected in Brent which is carrying over to both the Nymex HO and RBOB contracts while all that is bearish is being reflected in WTI which is not carrying over to the other commodities in the complex. The market is complicated with all of the major price drivers impacting some part of the oil complex.

In the Middle East Iran's parliament said they are ready to embargo oil exports to various European countries as a proactive response to the Europeans banning crude oil purchases from Iran by July, 2012. The difference with the Iranian ban is it is immediate meaning that the EU countries like Italy and Greece in particular will have to re-optimize their refining systems with non-Iranian crude oil sooner than later. I still view this as a logistics exercise and not one that will result in any significant shortage of oil for the European system...or elsewhere for that matter. If it does the IEA will simply and quickly release oil from the vast Strategic Petroleum Reserve. That said the market is continuing to add to the risk premium in the price of oil (mostly Brent as discussed above) in anticipation that the embargoes from both sides will result in some interruption in the supply of oil...in my view I do not expect that to happen.

On the bearish side of the equation there is still no debt deal coming out of Greece even as many thought this would have been all packaged up last week. The lack of a deal has moved the sovereign debt issues of the EU back into the forefront and is keeping the euro under pressure (firmer US dollar) as well as starting to impact the strong upside momentum that has been driving global equity prices higher since the beginning of the year. All of this is creating a bearish backdrop for oil and the broader commodity complex. However, as discussed above the bearishness is only spreading to WTI and not the rest of the oil complex. Not only is there still no deal in Greece but some of the major labor unions are orchestrating a strike in protest of what will likely to be further austerity measures that Greece will have to undertake in order to get the next tranche of bailout funds. The situation in Greece is still precarious at best with the potential for a default still a possibility...which is what is driving the negative sentiment throughout the currency and equity markets.

The global equity markets are lower across the board as shown in the EMI Global Equity Index table below. The EMI Index is down slightly over the last twenty four hours resulting in the year to date gain narrowing by 0.1% to 11%. Not a big downturn but the upward momentum has slowed on a combination of the equity markets being overbought and the lack of a deal in Greece as discussed above. I would not be surprised to see a further move to the downside in global equities if for nothing other than these markets are overbought and very susceptible to additional profit taking selling with Greece currently acting as the catalyst for such a move. This week's oil inventory reports will be released on their normal time and day. The API data will be released on Tuesday afternoon while the EIA data will hit the media airwaves at 10:30 AM EST on Wednesday. At the moment oil prices are still being mostly driven by the tensions evolving in the Middle East between Iran and the West (as discussed above) coupled with the direction of the euro and the US dollar. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data suggesting that this week's oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the new snippets out of the Middle East and the tick by tick direction of equities and the US 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. My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed inventory report this week with a modest build in crude oil and gasoline stocks, a seasonal decline in distillate stocks along with a small increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and a seasonal draw in distillate fuel stocks even as winter like weather still did not arrive during the report period in many parts of the US. I am expecting crude oil stocks to increase by about 2.2 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 3.9 million barrels while the overhang versus the five year average for the same week will widen around 10.8 million barrels.

With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by about 0.5 million barrels which would result in the gasoline year over year deficit coming in around 10.2 million barrels while the surplus versus the five year average for the same week will come in around 1.9 million barrels. Distillate fuel is projected to decrease by 0.9 million barrels on a combination of an increase in export. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year the deficit will likely now be about 19.9 million barrels below last year while the deficit versus the five year average will come in around 0.6 million barrels.

The following table compares my projections for this week's report (for the categories I am making projections) with the change in inventories for the same period last year. As you can see from the table last year for the same week was directionally in sync with the projections for this week. As such if the actual data in line with the projections there will not be a major change in the year over year comparisons. WTI is hovering around the intermediate support level while Brent remains in a slowly evolving uptrend. The momentum has changed and continuing to look toppy for WTI but not for Brent. However, I am still keeping my view at neutral (with a bias to the downside for WTI). I am currently expecting intermediate support around the $92.5/bbl area basis WTI and $109.50/bbl level for Brent with resistance around the $97/bbl level for WTI and $113.75/bbl for Brent. I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally. From a technical perspective the market remains oversold and additional rounds of short covering rallies are certainly very likely. That said unless there is a significant over performance of inventory withdrawals I still do not think the futures market will move outside the boundaries of the current $2.25/mmbtu to $2.85/mmbtu trading range that it has been in since earlier in the year. Barring any major announcement of significant production cutbacks I am still expecting the futures market to trade with a $1/handle sometime during the upcoming shoulder season.

Currently markets are mixed as shown in the following table.

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