Oil was on the defensive on Wednesday for the fifth trading session in a row after a mostly bearish EIA weekly inventory snapshot (see below for more details). The spot WTI contract is now below the $87/bbl support level as I discussed in yesterday's newsletter. The next major support for WTI is down to the $82/bbl level. Brent did not get hit as hard as the WTI market and has still been able to remain above its $107/bbl support area. As such the Dec Brent/WTI spread is widening once again.

As expected the US Fed ended its FOMC meeting with keeping all of the main policy programs in play... near zero short term interest rates until 2015, QE3 at a rate of about $40 billion per month with Operation Twist continuing as originally planned until at least the end of the year. The Fed did not make any major upgrade to the US economy and indicated that their policy programs will continue until the economy picks up... in particular the jobs market.

Overnight the oil complex has been in a mild short covering rally on news that the Bank of Japan may increase its quantitative easing program once again and a slowly growing view that the Chinese economy may finally be starting to bottom out. On the European front a degree of enthusiasm in an otherwise difficult region emerged today when the UK's GDP increased by 1% for the second quarter or the fastest growth in this country since 2007. The UK is now out of its double dip recession as the Olympic ticket sales as well as a surge in the services sector helped boost the economy. Although this is a positive data point for the UK it is not clear if this will be repeatable going forward.

Global equities have lost ground once again over the last twenty four hours although most Asian and European markets have added value as shown in the EMI Global Equity Index table below. The Index is now down by 1.7% for week narrowing the year to date gain to 6% of the lowest level since early September. The rankings within the Index have not changed in weeks with Germany still holding the top spot in the index while China remains the only bourse still in negative territory for the year. The global equity markets have been a negative price driver for the oil complex for most of this week but at the moment that could be changing for today.

Wednesday's EIA inventory report was mixed and bearish overall as total commercial stocks increased on the week. Overall I would categorize the report as biased to the bearish side as total commercial stocks increased modestly along with crude oil inventories as crude oil imports rose strongly on the week. Refinery utilization rates decreased marginally on the week to 87.2% of capacity. 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 increased by 4.1 million barrels after decreasing by about 2.7 million barrels the week before. The year over year surplus came in at 35.5 million barrels while the surplus versus the five year average for the same week narrowed to 39.2 million barrels.

Crude oil inventories increased (by 5.9 million barrels) and above the market expectations. Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. With the increase in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 37.5 million barrels while the surplus versus the five year average for the same week came in around 41.9 million barrels. Crude oil imports increased modestly on the week.

PADD 2 crude oil inventories decreased by about 0.8 million barrels while Cushing, Ok crude oil inventories were about unchanged on the week. The draw in PADD2 was expected and primarily as a result of the loss of two days of flow from the Keystone Pipeline during the report period. Crude oil inventories in the mid-west region of the US are off of their record high levels as the Seaway pipeline is now pumping oil out of the region as well as refineries returning to more normal operating levels. The decrease in crude oil inventories in PADD 2 and only small increase in Cushing is neutral for the Brent/WTI spread as the Keystone Pipeline is back online and inventories will once again grow in PADD 2. The Dec spread is trading around the $22/bbl level.

Distillate stocks decreased within the range of expectations) even as refinery run rates decreased by 0.2%. Heating oil/diesel stocks decreased by 0.7 million barrels after declining by 2.2 million barrels in the previous week. The year over year deficit came in around 27.5 million barrels while the five year average remained in a deficit of about 30.8 million barrels.

Gasoline inventories increased versus an expectations for a smaller build. Total gasoline stocks increased by about 1.5 million barrels on the week versus an expectation for a smaller build. The deficit versus last year came in at 6.3 million barrels while the deficit versus the five year average for the same week was about 5.7 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 a mixed categorization on the week as crude oil and gasoline were bearish while distillate and jet were bullish. Overall this week's report was biased to the bearish side as total stocks are once again back to building.

The tropics remain active but not threatening to oil or Nat Gas operations with two weather patterns in play... one in the Caribbean and one still out in the eastern Atlantic. The pattern has been upgraded to Hurricane Sandy. The current models do not show this pattern heading into the US Gulf. However, the latest projections show that this storm could work its way toward the northeast sometime next week. The other pattern... Tropical Storm Tony is out in the Atlantic and will remain out in the Atlantic. At the moment neither weather event is a threat to US oil and Nat Gas operations... but they are still worth keeping on the radar in the event that the pattern changes.

I have downgraded my overall view for the oil complex to cautiously bearish now that the spot WTI contract has breached its range support that has been in play since mid September. The new resistance level is the old range support level of $87/bbl. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics have continued to remain an issue for market participants.

I am keeping my Nat Gas price view at neutral as the fundamentals and technicals are once again keeping suggesting that the market may have topped out for the short term. I anticipate that the market will remain in a trading range until it becomes clearer as to how the heating season will evolve.

This week the EIA will release the weekly Nat Gas inventory report on its normal schedule... Thursday October 25 at 10:30 AM. This week I am projecting a 70 BCF net injection into inventory. My projection for this week is shown in the following table and is based on a week that experienced minimal Nat Gas heating or cooling related demand. My projection compares to last year's net injection of 95 BCF and the normal five year net injection for the same week of 65 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and widen marginally versus the five year average if the actual numbers are in sync with my projections. This week's injection will be at 74% of last year and 108% of the five year average for the same week if the actual outcome is in sync with my forecast. For interest the average for the injection season to date has been around 70.2% of last year.

If the actual EIA data is in line with my projections the year over year surplus will narrow to around 157 BCF. The surplus versus the five year average for the same week will widen to around 254 BCF. This will be a neutral to slightly bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of 55 BCF to 75 BCF with the consensus starting to form in the high 60's.

Markets are mostly higher heading into the US trading session as shown in the following table.

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


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