With Europe and most of Asia closed on Monday all of the trading action was primarily centered in the US market. The big event of the day was the much better than expected ISM manufacturing data released mid-morning. The data surprised all especially after the lackluster PMI data out of the US the other day. The risk asset markets moved into a strong rally once the data was released But from mid-day on asset values spent the rest of the session slowly giving back a major portion of the gains from earlier in the day.

At one point in time the rally sent US equity values to year to date highs while propping up just about every risk asset market that was currently open for trading. The market was also getting a boost from the start of a new month that normally results in fund money that was sitting on the sidelines getting placed into the market. The Asian and European markets held onto some of the US gains but equity futures in the US are now pointing toward a lower open on Wall Street. The EMI Global Equity Index gained 0.4% overnight widening the year to data gain to 9.4% (see following table). The US market will now be moving away from manufacturing and into the monthly employment world as the macroeconomic data to be released starting today will give traders and investors another look at the state of the lackluster employment situation in the US.
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Oil prices have also been drifting lower overnight after the API data showed a build in crude oil stocks but a larger than expected draw in both gasoline and distillate fuel. The oil market reacted very strongly to the better than expected US manufacturing data. In addition the complex breached an intermediate technical resistance area for crude oil carrying values even higher on the day. That said most of the action was in the WTI market with the Brent/WTI spread continuing to narrow throughout Monday's session and into this morning even after a large build in both Cushing and PADD 2 reported in the API report last night.

In my view not much has changed in the overall trading pattern of crude oil. WTI and Brent are still trading in the trading range that has been in place since mid-March. I expect the crude oil market to remain in the $102 to $106/bbl range for WTI and the $117 to $122/bbl for Brent for the next several weeks and likely until the outcome of upcoming May 23rd Iran/West meeting. The risk of a supply disruption from the Middle East is low while diplomacy is in motion and for the moment there is little likelihood of an oil demand push higher in prices. The main feature I expect to continue is the slow narrowing of the Brent/WTI spread as the prospect of oil moving out of the mid-West becomes a reality in about two weeks or so.

The API report showed a build in crude oil that was within the expectations but a much larger than expected decline in gasoline stocks and a surprise draw (and a large one) in distillate fuel inventories. The API reported a modest draw (of about 2 million barrels) in crude oil stocks and within the expectations as crude oil imports increased modestly even as refinery run rates also increased by 1.0%. The API reported a large draw in gasoline stocks and a large draw in distillate stocks versus an expectation for a more seasonal draw in gasoline and a small build in distillate fuel inventories.

The report is bullish for refined products and neutral to bearish for crude oil. The market has not reacted strongly in overnight trading but has been drifting lower for crude oil. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. The API reported a build of about 2 million barrels of crude oil with a build of 0.5 million barrels in PADD 2 and a build of 1.1 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread (although the spread is still in narrowing mode so far this morning). On the week gasoline stocks decreased by about 3.9 million barrels while distillate fuel stocks decreased by about 4.2 million barrels.
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At the moment oil prices are still being mostly driven by the direction of the euro and the US dollar as well as by a view that China's economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West have been easing as another meeting is scheduled for May. As such we may see more market participants starting to pay attention to this week's round of oil inventory data suggesting that this week's oil inventory reports could also start to impact price direction. This week's oil inventory report could move to being a primary price driver especially 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, a small decline in gasoline inventories and a modest build in distillate fuel stocks along with a small increase in refinery utilization rates. I am expecting a draw in gasoline inventories and a build in distillate fuel stocks as the summer planting season is still in play (increasing the demand for diesel fuel) while the heating oil demand is dissipating. I am expecting crude oil stocks to increase by about 2.1 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 12 million barrels while the overhang versus the five year average for the same week will widen to around 24.9 million barrels.

Even with refinery runs expected to increase by 0.2% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 0.8 million barrels which would result in the gasoline year over year surplus coming in around 5.3 million barrels while the deficit versus the five year average for the same week will come in around 23.8 million barrels.

Distillate fuel is projected to increase by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 20.1 million barrels below last year while the deficit versus the five year average will come in around 0.8 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 inventories declined across the board. As such if the actual data is in line with the projections there will be a modest
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I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $106/bbl. At the moment the oil complex is still going through a spread realignment driven by a reduction in the tensions in the Middle East and thus a receding of the Iranian risk premium along with a sentiment swing in the Brent/WTI spread due to the early start of the Seaway pipeline. I am more comfortable staying on the sidelines today for the flat price market.
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I am keeping my view at neutral and keeping my bias also at neutral with an eye toward the upside. The surplus is still building in inventory versus both last year and the five year average and could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.

Nat Gas has been in a pretty strong short covering rally for the last week or so primarily driven by an increase in demand from coal to gas switching along with a growing view that the producing sector will in fact voluntarily cut production versus being forced to cut production as US storage facilities get close to maximum working storage capacity. The better than expected manufacturing data today is certainly supportive for the demand side of the Nat Gas equation as manufacturing expands industrial consumption of Nat gas will certainly grow along with manufacturing (assuming manufacturing continues to expand from current levels).

That all said the key for Nat Gas prices to continue the week long uptrend that is now in place will be more indications that the producing sector is cutting production. That is the main key for a sustainable rally in Nat Gas prices to continue. From a technical perspective the signals are still pointing to higher prices. So far in the last few days the June Nymex contract has cleared resistance levels at $2.200, $2.250 and most recently at $3/mmbtu...which is now a support area. The next major resistance level will be around the $2.50/mmbtu that will have to be cleared for the rally to last into the higher demand summer cooling season. Although not technical at around $2.50 we could see some of the coal to Nat Gas switching starting to move in the other direction. So this will be a critical area to watch.

I remain cautiously bullish and will so until proven wrong. I maintain positions in the upcoming winter heating months as well as a small long position in the front end of the market. I am looking to add to the net long position on dips that hold support. Wow when was the last time you heard anyone talking about buying the dips in the Nat Gas market. I also think it is time for Nat Gas end users to either start to build or add to their longer term hedge portfolios especially for the end of this year and into 2013. Using options strategies may be a good starting area as it does provide some risk protection in the event that this is a limited rally.

Currently markets are mostly lower as shown in the table below.

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