The oil complex was able to hold onto gains even as the Cyprus relief rally the sent most risk asset market higher early in the session did not last very long. Equities and many risk asset markets ended Monday's session in negative territory as market participants once again started to be concerned that the conditions of the Cyprus deal could be the new standard for future bailout deals in Europe. The macroeconomic front was mostly quiet yesterday with traders and investors moving their focus slowly away from Cyprus and toward the value drivers that have been in play… especially the state of the global economy.

Today the economic data flow picks up with energy sensitive durable goods orders for the US along with housing data. In Asia overnight market participants were once again starting to expect the Chinese government to tighten the reins on measures to slow down the rising home prices. In addition exports unexpectedly declined from Hong Kong in February casting a negative cloud over most Asian equity markets today.

Oil prices have continued to move higher with the May Brent/WTI spread once again narrowing strongly over the last twenty four hours. This is the seventh week in a row that the spread has continued to narrow with only a few shallow and short lived short covering rallies along the way. The combination of crude oil inventories in Cushing now in the early stages of a destocking pattern and the North Sea production level running at normal to even above normal levels have been enough to result in the spread premium narrowing by about $10/bbl since early February.

The spot or May Brent/WTI spread breached and closed below another key technical support level of $13/bbl yesterday and seems to be heading for the next technical support level of $10.85/bbl or a level not seen since mid-June of 2012… basis the spot continuation chart. Resistance is now yesterday's $13/bbl support with the next level resistance back at the $14/bbl level.

With more oil flowing out of the mid-west and down to the US Gulf coast along with many refiners now returning from the spring maintenance season there is likely to be continued pressure on the spread in the short to medium term. I am still expecting the spread to be trading with a single digit during the second half of the year. However, the way the spread is trading of late a drop to single digits could happen sooner than I have been anticipating. Finally the spread is currently oversold and remains susceptible to a modest round of short covering that could be prompted if this week's Cushing crude stocks do not show another draw (I am actually expecting a small build in stocks).

Global equity markets are on the defensive so far this week as shown in the EMI Global Equity Index table below. The EMI Index is down by 0.11% for the week with the year to date loss for the Index widening to 1%. Brazil remains at the bottom of the leader board with a double digit loss for 2013 along with Hong Kong showing a small year to date loss. Japan remains on top of the leader board and once again showing a gain for 2013 of over 20% as a weak Yen has been a positive for this export driven economy. The US Dow is the only other bourse in the Index showing a double digit gain for the year. Global equities have been mixed with a bias to the negative side for the oil complex and the broader commodity complex so far this week.

This week's round of oil inventory reports will follow its normal schedule with the API data being released on Tuesday afternoon followed by the EIA report hitting the media airwaves at 10:30 am on Wednesday. My projections for this week's inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was winter like over the east coast... and a draw in gasoline stocks during the report period as refinery runs remain at below normal levels during the maintenance season.

I am expecting crude oil stocks to increase by about 1 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 27.3 million barrels while the overhang versus the five year average for the same week will come in around 40.9 million barrels.

I am expecting a small build in crude oil stocks in Cushing, Ok and in PADD 2 even as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be mildly bullish for the Brent/WTI spread and could serve as a catalyst for a short covering rally in the spread as it is currently oversold. However, with the North Sea operating normally only a small build in Cushing stocks may not be enough for anything other than a shallow and short lived short covering rally.

With refinery runs expected to increase by 0.2 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.0 million barrels which would result in the gasoline year over year deficit coming in around 1.6 million barrels while the surplus versus the five year average for the same week will narrow to around 0.4 million barrels.

Distillate fuel is projected to decrease by 1.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 17.3 million barrels below last year while the deficit versus the five year average will come in around 18.9 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's inventories are in directional sync with minimal differences compared to last year's changes. As such if the actual data is in line with the projections there will be only modest changes in the year over year inventory comparisons for crude oil.

I am maintaining my view of the entire complex at neutral as the oil complex still appears to be in the process of forming a short term technical bottom. However, WTI, HO and RBOB have all remained in a sideways trading pattern with refined products trading near the lower end of the trading range while Brent has now breached its range support level. The complex may still be in a bottoming pattern but it is now looking like the probability of another down leg is increasing based on the current assessment of the fundamentals, the way the external price drivers are trading as well as the technicals.

I am maintaining my view at cautiously bullish For Nat Gas as long as the spot contract remains above the $3.82 to $3.86/mmbtu technical support area that will need to hold to keep the current uptrend in play. If this level is breached with settlements below this area there could be a modest retracement in prices. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern and currently those forecasts have continued to be supportive for heating related Nat Gas demand even though spring has arrived.

Markets were mostly higher ending the trading week as shown in the following table.

Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.

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