Quote of the Day

By persisting in your path, though you forfeit the little, you gain the great.
Ralph Waldo Emerson


Geopolitics around the evolving situation in Libya continues to dominate the short term direction of oil prices and most other risk assets for that matter. Libya's Gaddafi continues to hang onto power, albeit over a much smaller area of Libya than just a week ago as many major cities have now been taken over by the opposition groups. Gaddafi is trying to enroll support from the citizens by raising wages and handing out allowances and food subsidies. The strategy of trying to buy off the populace has been a strategy by several Middle East countries including Saudi Arabia. Whether or not the whole freedom revolution in Libya can be eliminated by simply throwing money at the citizens in between shooting at them is a big unknown. In spite of his current money strategy he is continuing to lose his grip on the country as even more territory is in the control of the opposition groups today versus just yesterday. As I have been saying I think Libya is beyond the point of no return and the next several days are likely to be crucial to see if Gaddafi has a chance of hanging on to power. I would say no.

With the weekend coming we are not likely to see any major sell-off in oil prices as not many traders will be very comfortable heading into the weekend short with all of the tensions bubbling up in Libya and the rest of the region. If all stays quiet today I would expect oil prices to drift in a much smaller trading range than we saw yesterday. I still view the oil market as a much higher risk for moves to the upside rather than any major sell-off in the short term. Traders & investors can only play this market from the long side (with tight trailing stops) or not at all. The risk of getting short is overwhelmingly greater than the potential return from being short at this point in time. There will be a signal as to when to get short...it has not clearly emerged as of yet.

Equity markets have stabilized over the last twenty four hours as shown in the EMI Global Equity Index table below. Most markets have recovered some of this week's looses narrowing the weekly loss for the Index to 2.1% as well as narrowing the year to date loss to 0.2%. Although we have seen the equity markets in Asia, Europe and futures in the US all higher so far the gains today are still paltry compared to the losses accumulated for the week. I attribute most of the gains today (so far) to a round of short covering heading into the weekend with no signs that traders/inventors are ready to move out of safe haven investments in a big way and move back into risk assets. There is still not enough clarity as to the outcome of many key oil producing nations in North Africa and the Middle East.


Yesterday's EIA inventory report was mostly bullish but also mostly ignored as a result of the overwhelming focus on the evolving situation in Libya. All of the major oil commodities came in better than the expectations with total commercial stocks declining strongly for the second week in a row. There was only a modest build in crude oil stocks, and a large surprise decline in gasoline stocks as refinery utilization rates decreased strongly by 1.8% (adding to last week's strong decrease of 3.5%) while distillate fuel declined versus an expectation for a modest build. The EIA oil inventory report was overall bullish to in my view. 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 declined by 12.1 million barrels on the week after declining by 8.4 million barrels last week bringing the two week total decline to over 20 million barrels. The year over year surplus of total commercial stocks of crude oil and refined products narrowed to 10.7 million barrels while the overhang versus the five year average for the same week also narrowed to 38.2 million barrels.
The modest build in crude oil inventories of 0.8 million barrels versus most expectations for a much larger build was not enough to offset the decline in refined and unfinished products resulting in total commercial stocks declining. The crude oil inventory overhang versus last year narrowed to 9.2 million barrels while the surplus versus the five year average also narrowed to 16.7 million barrels. PADD 2 stocks increased strongly by about 1.7 million barrels while Cushing, Ok crude oil stocks decreased marginally by about 200,000 barrels on the week. The situation in PADD 2 is still hovering near record high crude oil inventory levels and basis this week's data there should be no market pressures that is likely to narrow the Brent/WTI spread in a major way. Much like everything else in the oil complex the short term direction of the Brent/WTI spread is being driven by the evolving situation in Libya. When the 30 second news snippets signal market participants to buy the spread narrows...when it appears there will be calm for the moment the spread widens back out as it has in the last twenty four hours.

This region of the US is still sitting with record high inventory levels and as such WTI should still continue to trade at a large discount to Brent which is much more reflective of the events unfolding in the Middle East. The April Brent/WTI spread is currently trading around $14.25/bbl premium to the Brent contract as a risk premium is slowly growing in Brent while an overhang discount is continuing to grow in the price of WTI. WTI and Brent are two different crudes currently being driven by two different scenarios. WTI remains mostly decoupled from the geopolitical event occurring in the Middle East while Brent is decoupled from the huge regional overhang of crude oil inventories in the mid-west portion of the US. As I have been mentioning the spread is overvalued and likely susceptible to a correction. However, that said one can only look for opportunities to get long Bent/short WTI as the trading pattern is not likely to change anytime soon.

Distillate stocks declined strongly versus an expectation for a modest decline in stocks. Heating oil/diesel stocks decreased by about 1.3 million barrels versus an expectation for a build of around 0.3 million barrels. The decline was all in the diesel category with heating oil stocks built on the week in spite of colder than normal temperatures throughout the main heating fuel consumption area of the US. The year over year surplus narrowed to 7.3 million barrel while the five year average overhang widened to 23.8 million barrels.

Gasoline inventories decreased strongly on the week versus an expectation for yet another modest build in stocks. Total gasoline stocks declined by about 2.8 million barrels on the week versus an expectation for a build of about 1.3 million barrels. That said over the last eight weeks gasoline stocks have increased by almost 24.7 million barrels. The deficit versus last year is gone but the surplus did narrow on the week to about 7.1 million barrels above last year at this time while the surplus versus the five year average also narrowed to 13.4 million barrels. Gasoline stocks remain on the radar as the concern grows that the overhang may increase strongly as the industry continues to keep refinery runs modestly high to support the heating fuel requirements for the rest of the winter heating season.

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 categorized everything as bullish except for crude oil which I categorized as neutral as stocks either built less than expected or the decline was greater than expected for others with total commercial stocks falling strongly on the week. This week's report was overall bullish. However, 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.


My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my overall view to be in sync with my bullish bias for all of the reasons I have been discussing over the last few days. But again I raise the caution flag that prices are a bit overdone and susceptible to a correction. Any event can trigger a sudden change in the direction of prices as we saw yesterday when crude oil traded in a huge, over $7/bbl trading range all based on the 30 second news snippets hitting the airwaves about Libya and the rest of the region. Be cautious and use tight, trailing stops in your short term trading book.

I am maintaining my Nat Gas view at neutral and changing my short term bias to neutral as I think the Nat Gas market is due for a correction.
Currently markets are firm as shown in the EMI Price Board table below.


 Best Regards,
Dominick A. Chirichella