Tuesday was a trading day that can be best categorized as dueling price drivers. The evolving geopolitical situation in the Mideast...especially Iran provided a bullish overtone while the ongoing saga around Greece was bearish. The market traded part of the day in positive territory and part of the day in negative territory with the bulls edging out the bears by the end of the day...but not by much. As I mentioned a few weeks ago the oil complex is starting to decouple itself from its reliance on the direction of the euro/US dollar and global equity markets and moving more based on geopolitics and fundamentals. This pattern is continuing to evolve.

Another bombing...this time in Bangkok by two Iranians was viewed by the Israelis as yet another attempt by Iran to target Israelis. As expected the Iranians have denied any involvement on their part. The tensions between Iran and Israel and Iran and the west in general are rising on an almost daily basis. Yesterday a US aircraft carrier sailed through the Straits of Hormuz with Iranian gunboats shadowing it. In addition the US and Europe are now considering evicting Iran from SWIFT...an independent financial clearinghouse that is critical to all of Iran's oil sales (most all financial transaction move through SWIFT). This unprecedented act is likely to have an almost immediate impact on Iran's exports (at least until something else can be worked out by Iran and its remaining counterparties). The objective of this new approach is to show that something is working immediately as most of the sanctions put in place to date are not showing the immediate results that may be needed to slow the Israelis from attacking Iran. The talk around the media is that Israel and the US may make a decision before the summer on military action against Iran. Iran remains the single biggest risk to the flow of oil and thus will continue to be responsible for the risk premium that is embedded and growing in the price of oil.

On the Greek front the deal is still not a final deal as the meeting of the EU Finance Ministers was postponed and is now a conference call that is to take place on Wednesday as the EU awaits all of the final documents required. On a more positive note overnight Greece has now agreed to provide written austerity promises to meet a condition of the bailout program. As I have been saying and I will say again the Greek economy is a mess and this deal is not going to solve the problems. It is simply going to postpone it for period of time. It will resurface as Greece will remain very susceptible to an economic meltdown and default irrespective of getting this round of bailout funds.

Global equity markets shrugged off the Greek saga and were able to minimize their losses on the day as shown in the EMI Global Equity Index table below. The EMI Index was slightly higher over the last twenty four hours maintaining a week to data gain of 1.7%. On the year the Index is higher by 11.6% with Germany and Hong Kong holding the top two spots in the Index. Global equities have been a supportive price driver for oil prices as well as the broader commodity complex. The API report showed a larger than expected build in a crude oil stocks along with a larger than expected build in gasoline stocks. The API reported a large build (of about 2.9 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports increased and refinery run rates decreased by 0.2%. The API reported a large build in gasoline stocks and a larger than expected draw in distillate stocks versus an expectation for a modest draw in inventories.

The report is mixed..bearish for crude oil and gasoline, and bullish for distillate. That said it is difficult to differentiate whether the changes overnight were from the inventory report (I doubt it) or from the movement of the macro indicators and the evolving geopolitics of the Mideast region. The market remains hostage to the evolving situation in Europe that has been unfolding along with the geopolitics of the mid-east this week as discussed above with inventory data a secondary driver. The API reported a build of about 2.9 million barrels of crude oil with a 2.0 million barrel build in Cushing and a build of about 0.7 million barrels in PADD 2 which is bullish for the Brent/WTI spread. On the week gasoline stocks built by about 1.8 million barrels while distillate fuel stocks decreased by about 2.2 million barrels. The EIA data will hit the media airwaves at 10:30 AM EST today. 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. This week's oil inventory reports will be released on their normal time and day. The API data will be released on Tuesday afternoon while the EIA data will hit the media airwaves at 10:30 AM EST on Wednesday. At the moment oil prices are still being mostly driven by the tensions evolving in the Middle East between Iran and the West (as discussed above) and to a much lesser extent based on the direction of the euro and the US dollar. 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. At the moment all market participants are continuing to follow the new snippets out of the Middle East and the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil. 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.

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 and gasoline stocks, a seasonal decline in distillate stocks along with a small decrease in refinery utilization rates. I am expecting a small build in gasoline inventories and a seasonal draw in distillate fuel stocks even as winter like weather did arrive for part of the report period in some parts of the US...in particular the east coast. I am expecting crude oil stocks to increase by about 2.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 4.7 million barrels while the overhang versus the five year average for the same week will narrow to around 9.5 million barrels.

With refinery runs expected to decrease by 0.3% I am expecting only a small build in gasoline stocks. Gasoline stocks are expected to increase by about 0.3 million barrels which would result in the gasoline year over year deficit coming in around 9 million barrels while the surplus versus the five year average for the same week will come in around 2.8 million barrels. Distillate fuel is projected to decrease by 0.9 million barrels on a combination of an increase in export. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year the deficit will likely now be about 15.6 million barrels below last year while the surplus versus the five year average will come in around 2.6 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 for the same week was directionally in sync with the projections for this week. As such if the actual data in line with the projections there will not be a major change in the year over year comparisons. WTI is still trading above its intermediate support level and seemingly settling in to a $97 to $102/bbl trading range. Brent has also breached its resistance level with a path that could possibly take it to the $119/bbl level. But as with WTI Brent is also settling into a new short term trading range of around $116/bbl to $119/bbl. Oil is mostly being driven by the evolving geopolitics of the Mideast...in particular Iran with just about all of the other normal prices drivers taking a secondary role...including fundamentals. I am keeping my view at cautiously bullish and keeping the caution flag flying to remind all that the market is still susceptible to a modest round of profit taking selling in the short term. I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally.

Nat Gas broke out of the triangular consolidation pattern to the upside today which was a bit of a surprise as the market normally (but not all of the time) breakouts of this type of pattern in the direction of the previous trend which was lower. We will have to wait and see if this is the real thing or just a false breakout. The magnitude of the breakout so far is below normal and possibly an early warning sign that it could be a false breakout. That said for the moment Nat Gas is moving higher.

On the fundamental side the market found some level of support from the above normal amount of nuclear plant outages...albeit several are coming back pretty quickly, a reduction of dry gas production (only what I have been discussing for the last week or so) a reduction of imports from Canada along with an increase in Nat Gas power generation. All of this has been enough to push the market into a modest short covering rally. How long it lasts and how deep the rally will be is an unknown in my mind as Thursday's inventory report is expected to be about as bearish as last week's report and the latest NOAA weather forecast is still modestly bearish.

Currently markets are mostly higher as shown in the following table.

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