Oil made a strong recovery on Tuesday on a combination of short covering and ongoing concern over the evolving geopolitical situation in the Middle East... in particular the growing conflict between Syria and Turkey. It is not that Syria and Turkey are significant oil exporters but Iraqi crude from the northern part of Iraq (Kirkuk) flows via pipeline thorough Turkey to Ceyhan. In addition if the Syrian civil war spreads further throughout the Middle East it is only going to result in another level of instability in a region that is very unstable and a region that exports the largest amount of oil to the consuming world countries. At least for a day the potential for a geopolitical supply disruption was the main focus of most of the oil market players.

At the moment yesterday's rally has eased as market participants are once again focusing on the slowing of the global economy and the impact that will potentially have on oil demand growth along with what is expected to be a weekly oil inventory report (EIA inventory report to be released tomorrow morning) that is currently projected to be biased to the bearish side with builds projected for both crude oil and refined products. The market is concerned about the possibility of a supply impact if the evolving geopolitical situating in the Middle East is elevated further. However, the current supply situation is more than balanced as OPEC is producing about 1 million barrels per day above their quota (latest from Reuters) with Saudi Arabian production around the 10 million barrel per day level and based on statements by the Saudi Oil Minister the 10 million barrels per day level is expected to continue through November at least. As has been the case for an extended period of time there is no shortage of crude oil anywhere in the world even with the Iranian sanctions impacting Iran's oil export level.

The monthly oil projections will begin to hit the media airwaves today with the OPEC report to be released this morning, the EIA report early this afternoon and the IEA report on Friday morning. The market will be looking very closely to see if all of the reports will once again lower their oil demand projections for 2012 and 2013 as the IMF has once again downgraded their global economic projections and the World Bank lowered their growth forecast for China... the main oil demand growth engine of the world. If oil demand growth continues to deteriorate and if global oil supply remains at the current elevated level oil inventories are likely to build for the rest of the year adding additional downward pressure on oil prices going forward. Barring a geopolitical supply disruption it currently looks like the fundamentals through the end of the year are likely to be biased to the bearish side for oil prices.

The OPEC monthly oil report was just released. Following are some of the main highlights from the report. They did lower their oil demand forecast for 2013 by about 30,000 bpd with the risk skewed to the downside.

• World economic growth in 2012 was revised down to 3.1% from 3.3% previously, reflecting slowing growth since the start of this year. Assuming the deceleration will bottom out in the current quarter, the forecast for 2013 has been left at 3.2%. The US expansion remains below potential at 2.2% in 2012 and 2.0% in 2013. Japan is increasingly feeling the weakness in exports and is seen expanding by 2.2% in 2012 and 1.1% in 2013. Meanwhile, the Euro-zone is expected to grow at 0.1% in 2013, following a contraction of 0.5% this year. The weakness in developed economies has been widely felt in the export-oriented emerging market economies. China is now forecast to expand by 7.6% in 2012 and 8.0% in the coming year. India is forecast to grow by 5.7% this year and 6.6% in 2013.

• World oil demand is expected to grow by 0.8 mb/d in 2013, unchanged from the previous forecast and in line with the growth for the current year, which has been revised down by 0.1 mb/d. The projections for global oil consumption continue to be affected by the uncertainties facing the world economy. Slower industrial production has sharply reduced global oil demand in both the US and China, and the winter outlook represents further uncertainties in the coming months. Risks to the forecast for 2013 are primarily on the downside, due to the turbulence in the world economy.

• Non-OPEC oil supply is now forecast to increase by 0.6 mb/d in 2012, following a downward revision of 0.1 mb/d from the previous month, due mainly to lower-than-expected supply from Brazil, Kazakhstan, China, Azerbaijan, and the UK. In 2013, non-OPEC oil supply is expected to grow by 0.9 mb/d, supported by anticipated growth in the US, Canada, Brazil, and Kazakhstan, as well as Sudan and South Sudan. OPEC NGLs and nonconventional oils are expected to increase by 0.4 mb/d in 2012, and 0.2 mb/d in 2013. In September, total OPEC crude production averaged 31.08 mb/d, according to secondary sources, representing a drop of 265 tb/d from the previous month.

• Demand for OPEC crude for this year has been revised up by 0.2 mb/d from the previous assessment to stand at 30.1 mb/d, representing a decline of 0.1 mb/d compared to last year. In 2013, demand for OPEC crude is forecast to average 29.8 mb/d, a decline of 0.3 mb/d from the current year and representing an upward adjustment of 0.2 mb/d from the previous report.

In the tropics there are still a few weather patterns to keep on the radar. As of this morning there are two areas... one a couple hundred miles northeast of the Bahamas and one about 1,050 miles east of the Windward Islands. Neither pattern has a very high probability of strengthening into a tropical cycle over the next forty eight hours nor is their direction currently projected yet. Thus nothing needs to be done on the oil or Nat Gas front other than to simply watch the progress over the next few days.

From a technical perspective both WTI and Brent have been in a relatively wide trading range for the last three weeks or so with WTI trading between $88/bbl to about $94/bbl while Brent has traded between about $107/bbl and $115/bbl. Both of these markets have been relatively indecisive as to their next price direction. Over the last three weeks about half of the trading sessions ended lower on the day with the other half ending higher... certainly a market that is laden with uncertainty and not a strong conviction one way or the other at the moment.

Global equities have been on the defensive for the last twenty four hours as shown in the EMI Global Equity Table below. The only bourse that gained value over the last twenty four hours was China which had a minor gain in a global market that saw most all other bourses drifting lower. The EMI Index is now lower by 0.5% for the week resulting in the year to date gain narrowing to 6.5%. The rankings have remained the same with Germany still on top of the leader board with a year to date gain of 22.5% followed by Hong Kong and the US which are both still showing double digit gains for the year. Global equities have been a negative price driver for oil and the boarder commodity complex over the last day or so.

The weekly inventory cycle has been delayed by one day due to the Columbus Day holiday on Monday. The weekly oil inventory cycle will begin with the release of the API inventory report Wednesday afternoon and with the more widely followed EIA oil inventory report being released Thursday morning at 11:00 AM EST. With the global economy and oil fundamentals becoming more the focus of the trading and investing community this week's oil inventory report could be a price catalyst especially if the actual outcome shows a large deviation from the projections. However, any inventory reaction could be short lived if the macroeconomic data remains the main focus of most market players.

My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to hold relatively steady even as there have been a rash of refinery issues over the last several weeks. I am expecting a modest build in crude oil inventories, and a build in both gasoline and distillate fuel stocks. I am expecting crude oil stocks to increase by about 2 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 29.1 million barrels while the overhang versus the five year average for the same week will come in around 35 million barrels.

I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would normally be bearish for the Brent/WTI spread in the short term but the spread is currently trading at the highest premium to Brent in over a year. The slow return from maintenance in the North Sea has been the main driver that has resulted in the Nov Brent/WTI spread now trading over the $22.50/bbl level as of this writing. The widening of the spread should begin to ease once the North Sea returns to a more normal production level over the next month or two.

With refinery runs expected to increase by 0.3% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1 million barrels which would result in the gasoline year over year deficit coming in around 12.7 million barrels while the deficit versus the five year average for the same week will come in around 7.8 million barrels.

Distillate fuel is projected to increase by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 28.9 million barrels below last year while the deficit versus the five year average will come in around 26.1 million barrels.

The above 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's inventories are not in directional sync with this week's projections. As such if the actual data is in line with the projections there will be a significant change in the year over year inventory comparisons.

The oil complex has breached all of its current support levels and as such I am keeping my view at neutral for today as crude oil continues to trade within a wide trading range (see above for more comments). The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics has continued to remain an issue for market participants.

I am keeping my Nat Gas price view at neutral with a neutral bias. Even though current prices favor coal over Nat Gas (based on a macroeconomic comparison) the market is now more focused on the upcoming winter heating season and what it may due to Nat Gas demand.

Markets are mostly mixed to start the US trading session as shown in the following table.

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


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