Yesterday was clearly a so called risk on day as market participants interpreted Spain's better than expected auction results that all is ok in Europe. The markets remain so interlinked that something as simple as a modestly oversubscribed auction from a country that is struggling to get its house in order was enough to drive just about every risk asset market higher. Nothing has changed insofar as economic growth as the global economy is still slowing down and thus oil demand will also slow. In addition nothing new on the Iran/West nuclear standoff other than the tensions are easing as another meeting is scheduled for May 23rd. All signals ...fundamental and technical point to lower oil prices.

That said there is still a massive amount of spread unwinding which is keeping WTI well bid while just about every oil commodity that has been priced against Brent is well offered. The Brent/WTI spread is continuing to unwind as is all of the WTI/refined product crack spreads. Last night's API data (see below for more details) showed a larger than expected build in WTI. If the EIA data confirms the API data it is likely that WTI will begin to catch up with the downward move in just about everything else in the oil complex.

Brent continues to give back more of the Iranian risk premium and is now just about $8/bbl above where it was trading when the EU announced the Iranian crude oil purchase embargo while WTI is carrying a premium of about $6/bbl at the moment. I expect to see the risk premium continue to recede over the coming weeks as long as the rhetoric between the West and Iran does not heat up and the meeting in May remains on schedule. In addition if the macroeconomic data continues to support a slowing of the global economy oil will have a difficult time remaining at the current elevated levels in the short to medium term.

I must comment on the move by President Obama yesterday who said that oil manipulation is causing higher oil prices and measures must be taken to stop the manipulation. This is troublesome as this is not the reason for high oil prices at all. He wants much higher margins on oil (but not other staple commodities like grains or base metals, etc), He wants more money to police the oil market and stricter position limits. The word manipulation says to me that a criminal act has occurred. I am not sure I understand that buying oil because there is the potential for a major war in the region of the world that provides over 40% of the world's oil is a crime or an act of manipulation. Nor do I understand that buying oil because the central bankers of the world are flooding the global economy with liquidity thus raising the risk of inflation and act of manipulation.

The President has missed the entire reason why the oil market has been carrying a risk premium and what he did yesterday is yet another political act in an election year. He also did not indicate that manipulation was present in the Nat Gas market which has been sold down to the lowest level in over a decade by the same speculative community that has bought oil. So I guess buying a commodity is manipulation and selling it short is ok. I hate to write about this nonsense but it is troublesome that it plays to the part of the population that thinks his statements are the reason for higher gasoline prices. Politics are going to make a potential mess of a very efficient commodity marketplace. Enough said.

The API report showed a much larger than expected build in crude oil stocks for the fourth week in a row, and a larger than expected decline in both gasoline and distillate fuel stocks. The API reported a strong build (of about 3.4 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports increased while refinery run rates also increased marginally by 0.1%. 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 inventories.

The report is bearish for crude oil and bullish for refined products. The market has moved lower overnight since the report has been issued but on relatively low volume. The downside move in oil is more as a result of the unwinding of the spreads as discussed above. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out tomorrow. The API reported a build of about 3.4 million barrels of crude oil with a build of 1.2 million barrels in PADD 2 and a build of 0.6 million barrels in Cushing, Ok which is bullish for the Brent/WTI spread. On the week gasoline stocks decreased by about 2.6 million barrels while distillate fuel stocks decreased by about 2.4 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 starting to slow. The tensions evolving in the Middle East between Iran and the West have eased a bit as another meeting is scheduled for May. 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. 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, a small decline in distillate fuel inventories and a modest decline in gasoline stocks along with a small increase in refinery utilization rates. I am expecting a draw in gasoline inventories and distillate fuel stocks as the summer planting season is very strong (increasing the demand for diesel fuel) while the export market remains robust. I am expecting crude oil stocks to increase by about 1.2 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 7.1 million barrels while the overhang versus the five year average for the same week will widen to around 22.9 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 1.0 million barrels which would result in the gasoline year over year surplus coming in around 6.9 million barrels while the deficit versus the five year average for the same week will come in around 18.1 million barrels.
Distillate fuel is projected to decrease by 0.3 million barrels on a combination of steady exports and strong demand coming from the summer crop plantings. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.2 million barrels below last year while the deficit versus the five year average will come in around 0.5 million barrels.

I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $107/bbl. At the moment the oil complex is 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 still keeping my view at and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season. As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.

So goes the early week short covering rally and back to the more normal movement for Nat Gas...lower. The market remains in the downtrend with no signs of any structural changes at this point in time. Today we hit a new fresh 10 year low in Nat Gas futures prices and I still believe new lows are yet to come. Nat Gas reminds me of when my grandchildren are in the car for a ride...much like all kids they continue to ask are we there yet. Translating to Nat Gas and for all of the bottom pickers we are not there yet. We are in the midst of the low demand shoulder season and at the moment I do not see anything that can change the demand side of the equation.

As I have said way too many times in this newsletter...but it is still the case....only significant supply cuts are going to stop the slow deterioration in the value of Nat Gas. There is simply too much supply chasing too little demand at this time of the year and the net result is and will continue to be inventories working their way toward the maximum storage capacity far too soon this year. Yes I see lower prices until supply is curtailed either voluntarily or forced via hurricanes and/or infrastructure limitations (storage).

Currently markets are mixed 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.