Oil (WTI) have been trading a tad below the triple digit level in early morning trading as market participants await the next signal for the next leg. As we have been discussing all year the three main price drivers for oil have been (and still remain) the direction of the euro/USD (driven by the evolving debt situation in Europe), China's attempt at a soft landing and transition into an expansion mode as well as the geopolitical issues in and around the Middle East with Iran at the center. Most all of the other normal drivers for oil prices have taken a secondary role including the weekly oil inventory report which was released yesterday (see below for a detailed discussion in the EIA inventory report).

The euro has been staging a modest upside recovery or short covering rally for most of 2012 (so far) as the European debt situation seems to be getting more and more under control. The market is slowly starting to move to a view that the EU will not implode and the impact of the sovereign debt problems over the last three years may be a move by the EU back into a mild recession...not worse. The growing or change in sentiment from last year has resulted in a bottoming pattern formed for the euro which has spread to a short covering rally in most of the European equity bourses with oil and other commodities coming along for the ride. The further and further Europe moves into the background the greater the chance that global risk asset market (like oil) will begin to focus on value drivers that are much more representative of the individual risk assets and the regions of the world they are impacted by. For the last three weeks Europe has provided a positive backdrop to equity and commodity markets. It is a significant improvement even over the end of last year. As I have previously discussed how long it lasts before a plethora of negative news emerges (if at all) is certainly an unknown and a risk factor that must be dealt with. For now enjoy the lack of bad or negative news.

Over in Asia the news have been mixed but interpreted as a bit of bad news could result in good news. Obviously China is the main economic and thus commodity growth engine in the world. So all eyes always look first at China when analyzing the emerging market world. The macroeconomic data out of China this year has not been overly bullish unto itself but it is being interpreted as mostly bullish because it is suggesting that China is looking like they are orchestrating a soft landing but most importantly the soft macroeconomic data is strongly suggesting that the Chinese government will continue to get more aggressive in moving to an accommodative monetary policy.

From the China side of the world the investor/trader community is viewing the evolving situation in China as a perception that this meteoric economy will once again be stimulated and move into a sustainable expansion mode. An example of this growing mentality was the preliminary reading of the January Purchasing Managers Index which came in at 48.4 versus 48.7 for December. Below 50 signals a contraction in manufacturing. The January data was flat versus December. Earlier last year a data point like this one would have resulted in strong selling in equities and oil prices. The market views the data as another reason for the government to get more aggressive to stimulate the economy. For now China is providing a positive backdrop for global equity & commodity markets including oil.

On the geopolitical front the war of words between the west & Iran continues. Just this morning French President Sarkozy lashed out at Iran suggesting that they need to hit the negotiating table as a military option is essentially still on the table...although all are doing everything possible to not take that route. The vote by the EU on embargoing EU purchases of Iranian crude oil is likely to be approved on Monday (Jan 23rd). The main detail is whether it will be phased in over six months or three months as the French would prefer. Next week the ball will be back in the hands of the Iranians. I am certain the negative rhetoric will step up a notch about blocking the Straits of Hormuz. This issue will play a role on oil prices next week.

The global equity markets have continued to add value as shown in the EMI Global Equity Index table below. The Index is now up by 3.8% on the week widening the year to date gains to 7.1%. Yesterday's positive macroeconomic data out of the US also contributed to the ongoing rally in most global equity markets. As I have discussed on several occasions the dogs of last year are now sitting at the top of the list of gainers for this year... so far. Last year's big losers... like Germany, Hong Kong and Brazil are benefiting from a massive short covering rally in those market along with a risk on mentality permeating throughout the global equity markets. Equities have been a positive price driver for oil prices for all of 2012 ...so far. Yesterday's EIA inventory report was overall neutral to bearish even as it showed a modest draw in total stocks, a larger than expected draw in crude oil, but a larger than expected build in gasoline inventories as implied demand was lower (for gasoline) while refinery utilization rates decreased on the week to 83.7% of capacity a decrease of 1.9% in refinery run rates. 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 decreased modestly on the week by 3.4 million barrels after gaining over 5.4 the previous week. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 42st week in a row. The year over year deficit came in at 35.1 million barrels while the overhang versus the five year average for the same week came in around 1.6 million barrels.

Crude oil inventories decreased versus an expectation for a modest build. With a decrease in stocks this week the crude oil inventory status versus last year is now showing a deficit of around 4.5 million barrels while the surplus versus the five year average for the same week narrowed to around 10.8 million barrels. PADD 2 stocks were about unchanged on the week while Cushing stocks declined by about 0.8 million barrels. Crude oil inventories in this region of the US have been in a decline and are still at levels not seen since 2010 when the Brent/WTI spread was trading at significantly lower levels. The spread continues to hold its gains for the week mostly due to the concerns over the possible EU embargo of Iranian oil purchases. Distillate stocks increased modestly versus an expectation for a small build. Heating oil/diesel stocks increased by 0.4 million barrels. The year over year deficit widened to 17.8 million barrels while the five year average deficit back to a small deficit of about 0.4 million barrels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season starts to get much colder the current level of exports will likely continue.

Gasoline inventories increased strongly on the week versus an expectation for a modest build. Total gasoline stocks increased by about 3.7 million barrels on the week versus an expectation for a build of about 2.0 million barrels. The deficit versus last year came in at 0.1 million barrels while the surplus versus the five year average for the same week widened to about 8.2 million barrels.

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 presented an mixed categorization with crude oil the only bullish commodity in the complex but with an asterisk in my view as imports declined sharply last week suggesting a delay in offloading rather than a structural change in the flow of oil into the US. I would expect to see a big increase in imports next week. The WTI market remains above support and has moved back in the direction of making a move toward the upper end of the trading range. As such I am keeping my view back to cautiously bullish. I am currently expecting intermediate support around the $98 to $98.25/bbl area and resistance around the $103/bbl level. I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster a sustained upside rally absent some very cold weather for an extended period of time. If the winter weather does not arrive over the next few weeks (not likely) I would not be the least bit surprised to see the spot Nat Gas futures contract continue trading with a $2 handle.

I must admit I did not think the spot Nat Gas futures contract with actually hit the 2009 lows of $2.39 this fast. It did during the overnight trading session and is now trading solidly below that level. I was expecting a test of this support level in a few weeks after the inventory surplus grew even more. That said as I mentioned in yesterday's newsletter I was convinced there would be a test of this critical support level. So far today the market is below the $2.39/mmbtu after yet another bearish inventory report. If prices remain below this level there really is not much support in the market until we go down to the early 2002 lows of $1.905/mmbtu. Just imagine Nat Gas trading with a $1 handle in the heart of the winter heating season...or should I say the lack of a winter heating season.

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

Note: For the next two weeks I will be in Europe doing courses. As such the Energy Market Analysis will likely be published at different times Dominick

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