In a quiet trading session the markets on Monday were relatively range bound and still mostly driven by Europe and the plethora of downgrades include the latest one on Monday of the EU bailout fund. As was the case on Friday the initial rumor of the downgrades resulted in a round of selling but as the downgrades became a reality the selling quickly stopped and the market traded in a sell the rumor and buy the fact mode. Yesterday's downgrade has had no negative impact on the market so far today.

So far today the market is mostly being driven by the latest fourth quarter GDP data out of China which came in better than the expectations but below the third quarter level. The latest GDP data for the 4th quarter came in at an 8.9% increase compared to the same period a year ago but not as robust as the third quarter's 9.1% rate. The expectations were looking for a growth rate of 8.6%. The view in the market over the Chinese data is a positive from two perspective. First they seem to be orchestrating a soft landing and are still seeing their economy grow at a relatively modest rate. Second it is not growing at the rate like it was a few years ago and as such it is likely to be another catalyst to motivate the Chinese government to aggressively move to an accommodative monetary policy especially since inflation in China seems to be in control. Any stimulus to accelerate the growth of China's economy will result in an increase in demand for oil and most all commodities.

For today Europe is slowly moving into the background with China moving into the foreground. The euro has recovered from last week's lows and is already higher by almost 1% on the session. With the macro correlations still well in place a firming euro and corresponding declining US dollar have been supportive for most risk asset markets including both equities sand commodities. This seems to be the pattern as we start a shortened trading week in the US.

Global equities are starting the third week of the year with the third consecutive start to a week with gains as shown in the EMI Global Equity Index table below. The Index is already higher by about 1.5% on the week (without the US market trading yet this week) resulting in the year to date gain widening to 4.5%. This has been a very positive start for the global equity markets this year after a very negative 2011 where several bourses were actually in bear market territory for the year. The dogs of last year remain at the top of the list of bourses in the Index as those bourses are benefiting by ongoing short covering as well as fresh risk buying in these markets. Equities have been supportive for oil prices as well as the broader global commodity complex. On the geopolitical front Nigeria seems to be moving to the back burner as the President of Nigeria reinstated a partial fuel subsidy which lowers the price of fuel by about a third compared to the current market price in Nigeria. So far this seems to be enough to reduce the possibility of a major strike by the oil workers union that would have resulted in a shutdown of at least some of Nigeria's oil production.

Moving to the Middle East the war of words continues between the west and Iran and over the last several days between Iran and other Middle Eastern oil producers...in particular Saudi Arabia. The EU is moving closer to enacting an embargo of Iranian crude oil purchases by EU member countries. The meeting is to be held on Jan 23rd. Today French President Sarkozy indicated that he does not want a six month phase in rather he wants to see the embargo phased in over just three months. Not sure who will win that discussion yet but it certainly is looking like the vote for an embargo is likely to be approved.

Yesterday in a CNN interview the Saudi's indicated they want oil prices stable around the $100/bbl level. The Saudi Oil minister said that they could increase oil production by about 2 million bpd almost immediately from current levels...in a few days. In my opinion I would interpret the Saudi's elaboration of their capabilities and target oil price as a passive message back to Iran who said over the weekend that Saudi Arabia and other GCC producers should not increase production to replace lost Iranian oil. So the war of words ratchets up as the EU nears their vote on Jan 23rd to approve (or not) an EU embargo of Iranian crude oil purchases for Europe to be phased in over a six month period of time. You also know my view on this subject... an embargo will result in a logistics exercise and any lost oil (if any) would be made up by Saudi Arabia and other GCC members irrespective of the veiled threats coming from Iran.

This week's oil inventory reports will be delayed by one day due to the closing of US government offices for a holiday yesterday. The API data will be released on Wednesday afternoon while the EIA data will hit the media airwaves at 11 AM EST on Thursday. At the moment oil prices are still being mostly driven by the tensions building in the Middle East between Iran and the West (as discussed above) coupled with 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 across the board builds in inventory this week with a modest build in crude oil stocks along with a decrease in refinery utilization rates. I am expecting a strong build in gasoline inventories and an unseasonable build in distillate fuel stocks as winter like weather did not arrive during the report period in most parts of the US...especially the large HO market along the north east. 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 surplus of crude oil will come in around 0.9 million barrels while the overhang versus the five year average for the same week will widen around 16.3 million barrels. With refinery runs expected to decrease by 0.3% I am still expecting a build in gasoline stocks. Gasoline stocks are expected to increase by about 2.0 million barrels which would result in the gasoline year over year deficit coming in around 1.9 million barrels while the surplus versus the five year average for the same week will come in around 6.5 million barrels.

Distillate fuel is projected to increase by 1.5 million barrels on a combination an increase in production and lower than normal heating oil consumption. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year the deficit will likely now be about 16.7 million barrels below last year while the surplus versus the five year average will come in around 0.6 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 on the year over year comparisons. Tomorrow the next round of the major monthly oil supply & demand forecast reports hit the media airwaves when the IEA releases their latest Oil Monthly Outlook. As has been the case for months the main item the market will be looking at will be the forecast for global consumption and whether or not the EIA made any downside consumption adjustments since the last report was issued. The EIA decreased their projection of oil demand growth in their report released last 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 moving 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 I would not be the least bit surprised to see the spot Nat Gas futures contract continue trading with a $2 handle.

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

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