In the second day of relatively quiet trading activity most risk asset markets were able to hold onto gains for the day on Tuesday. Europe is slowing moving to the background while most of the macro economic data that hit the media airwaves over the last twenty four hours were mostly positive and better than the expectations. Oil was firm throughout most of the trading session with WTI making a pass at breaching the triple digit level but was unsuccessful settling a bit below. Oil continued to trade in close sync to the direction of the US dollar as the macro trade remained solidly in play yesterday.

So far today the ECB began to buy Italian and Spanish 10 yr bonds and for the first time in three days bonds rose. This is a positive outcome for the markets. In addition the new Italian Prime Minister is ready to announce his government while the new Greek Prime Minister will face a vote to give him a three month mandate to implement the new austerity budget measures. As it appears at the moment the situation in Europe is quieting down and seemingly on a path to move into the background for now. If so I remain positive for most risk asset markets and would expect the gains in oil, equity and commodities to hold and a modest risk asset rally to slowly get underway.

The API data was mixed but mostly in sync with most of the projections...including my projections. The API reported a small build in crude oil stocks versus an expectation for a modest draw in crude oil inventories of about 1.3 million barrels as crude oil imports decreased marginally while refinery run rates increased by 1.8%. The API reported a much larger than expected draw in gasoline stocks and a larger than expected decline in distillate fuel inventories.

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The market was expecting a small draw in crude oil stocks and a modest draw in gasoline and distillate fuel inventories this week. The report is slightly bullish but it has not resulted in any major price action coming into the market since the data was released late yesterday afternoon. The market remains hostage to the outcome of the European soap opera that has been unfolding once again this week as discussed above with inventory data a secondary driver. The API reported a draw of about 1.3 million barrels of crude oil with a 0.8 million barrel draw in Cushing and a decline of about 0.6 million barrels in PADD 2 which is bearish for the Brent/WTI spread which has been narrowing of late. On the week gasoline stocks decreased by about 2.9 million barrels while distillate fuel stocks drew by about 2.6 million barrels. The more widely watched EIA data will be released this morning. Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today.

Once again I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe is still in a state of turmoil and uncertainty 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 tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil once again. 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. The normal weekly reports get underway this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Wednesday morning.

My projections for this week's inventory reports are summarized in the following table. I am expecting an across the board draw in stocks along with a marginal decrease in refinery utilization rates which should result in a slightly bullish weekly fundamental snapshot. I am expecting a modest draw in crude oil stocks with a decrease in refinery utilization rates. I am expecting a modest draw in gasoline inventories and distillate fuel stocks. I am expecting crude oil stocks to decrease by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 27.8 million barrels while the overhang versus the five year average for the same week will also narrow to around 4.1 million barrels.

With refinery runs expected to decrease by 0.4% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decline by about 0.7 million barrels which would result in the gasoline year over year deficit widening to around 6.9 million barrels while the deficit versus the five year average for the same week will widen to around 5.4 million barrels.

Distillate fuel is projected to decrease modestly by 2.0 million barrels on a combination a decrease in production and a possible increase in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 26.0 million barrels below last year while the overhang versus the five year average will widen to around 9.4 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 experienced an across the board draw that was larger than the current projections for this year. Thus based on my projections the comparison to last year will result in a modest level of restocking for crude oil and distillate fuel oil inventories.
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WTI is still trading above another key technical support level of the mid- $94's/bbl and along with the changing fundamentals I am still keeping my view and bias at cautiously bullish as the cloud of uncertainty in Europe has eased. The situation in the EU is still in turmoil but progress could emerge this week. That said WTI & Brent could become linked back to the direction of the US dollar and the Euro but for the moment it has pretty much decoupled this link.
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I am still bearish and am becoming more convinced that there is more downside in the price of Nat Gas. Right now I would categorize the current market action as a market with a downside bias. I am keeping my view and bias at bearish as I watch how price activity plays out over the next several trading session. I must say in looking at the fundamentals it is still hard to be anything other than bearish.

Reality is starting to sink into the sentiment of the so called winter bulls in waiting. That reality is Nat Gas continues to be simply bearish on all fronts and from all angles. The technicals are now trading solidly below the last support level of around $3.44 with a wide open area all the way down to about $3.22/mmbtu before the next support level is hit. For what it is worth last year's low price for the shoulder season was $3.292/mmbtu...another oversupplied year. Technically we can certainly see a test of the next support level prior to the start of the winter heating season.

From a fundamental perspective the latest six to ten day and eight to fourteen day forecasts are calling for unseasonably mild weather over most of the US...especially in the eight to fourteen day forecast. The temperature forecast certainly does not look like there is going to be any bump up in heating consumption at least through the month of November and possibly into early December. While we are waiting for winter heating demand to kick in supply will keep on coming and that is the prescription for the injection season lasting at least for two or three weeks more and maybe into early December before we see net withdrawals from inventory. Thus I can only say for the short term (at least) the fundamentals are bearish.

Once the winter heating season fully arrives we will then assess if net withdrawals from inventory are above or below normal and thus we can make a better call on the medium term view for the fundamentals. Based on the current winter weather forecasts I view inventory levels as being way more than adequate for handling projected demand (based on the forecasts) at this point in time. Finally even with the US economy looking a tad better than a few months ago industrial consumption is still sluggish at beat.

Currently as a new day of trading gets underway in the US markets are lower as shown in the following table.

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