Oil and most risk asset markets were hit with another round of selling on Thursday with oil (except RBOB) remaining near the lower end of its intraday trading range throughout the session. The spot WTI contract is now trading very close to its lowest level of the year while Brent is now within about $3/bbl of its year to date low. The oil complex has been trading ahead of its current fundamentals and the downward correction this week has certainly helped to bring the price of oil more in line with its current fundamentals. Total oil stocks in the US remain well above both last year and the five year average for the same week (see a more detailed discussion in inventories below). Yesterday's EIA oil inventory report was mixed... bearish for crude oil but supportive for refined products...and thus the crack spreads.

RBOB gasoline futures remained out of sync with the rest of the oil complex. After starting Thursday's session deep in negative territory the market rebounded strongly after the EIA inventory report showed a surprise 2.8 million barrel draw that was larger than the expectations. On Thursday the market settled about $0.05/gallon above its intraday low signaling from a technical viewpoint that the profit taking selling that has hit the RBOB market since last Friday may be over for the short term. Overnight the spot RBIB contract has moved mildly higher and has now wiped out all of yesterday's loss.

I am not sure the RBOB gasoline market is starting a new up leg at this point but it now appears that the sellers have backed off as the concern that supply issues may arise as we enter the summer driving season have been once again been ignited after yesterday's bullish inventory data point. The spot RBOB futures contract needs to breach the $3.30/gallon support level (and close above it) to signal that a new upside leg has started. Until then we have to treat the move in gasoline as well as the rest of the oil complex as just a short covering rally at the moment.

The April Brent/WTI spread remains within its $21.65 to $19.75/bbl trading range with the market looking like it may be positioned to test the upper range resistance as of this writing. Yesterday the EIA reported a modest build in Cushing, Ok while PADD 2 stocks were basically unchanged. That was slightly bullish for the spread.

Next week Iran and P5+1 meet in Kazakhstan with rumors that the west may possibly be offering Iran a significant offer. I have not seen any other details on this topic but certainly if this means that there is a possibility of a deal of some sorts it would certainly be bearish for oil as it would more than likely involve a lifting of the current sanctions on Iran and thus an increase in oil flow from Iran. I would not count on any deal as the history of this negotiations go back many years and so far nothing has been accomplished. In any event this needs to be high on the radar for next week as it could turn out to be market mover even if nothing is accomplished as I believe some of the selling we have seen in oil over the last several days was the market responding to the aforementioned rumor.

Yesterday's economic data out of the US was mixed to slightly negative adding more fuel to the selling fire for the risk asset markets. Overnight the economic data was also mixed with Singapore's Q4 GDP coming in much better than expected and better than the first reading while German business confidence rose to 107.4 from 104.3 in January That was the fourth straight gain. On the other hand the EU commission came out with their forecast indicating that they expect the EU to contract for the second year in a row in 2013. They are projecting GDP for the EU will decline by 0.3% compared with their last projection in November which actually projected a growth rate of 0.1%. So overall this week the economic data has been neutral at best and has certainly not provided much support to the global risk asset markets.

Global equities continue in a downside corrective mode as shown in the EMI Global Equity Index table below. The Index was about unchanged overnight but is still showing a 0.9% loss for the week with the year to date now showing a loss of 1.3%. At the moment after a bit of a recovery in European trading this morning Brazil is now the only bourse still in negative territory for the year. Japan remains on top of the leader board with Australia a close second and at the highest rank in the EMI Index in well over a year. Overnight the Prime Minister of Australia painted a positive economic picture of its economy in a speech before government. Overall global equities are a neutral at the moment.

Yesterday's EIA inventory report was mixed with crude oil bearish and refined products bullish with total commercial stocks declining modestly on the week. Overall I would categorize the report as neural as total commercial stocks decreased by 1.3 million barrels even as total crude oil inventories gained and imports increased. Refinery utilization rates decreased strongly by 0.9% on the week to 82.9% of capacity which will be bearish for crude oil as demand declines heading into the maintenance season. 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 by 1.3 million barrels. The year over year surplus came in at 35.7 million barrels while the surplus versus the five year average for the same week held at 59.3 million barrels.

Crude oil inventories increased (by 4.1 million barrels) and greater than 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 showing a surplus of around 35.7 million barrels while the surplus versus the five year average for the same week came in around 61.1 million barrels. Crude oil imports increased on the week.

PADD 2 crude oil inventories declined slightly by about 0.1 million barrels while Cushing, Ok crude oil inventories built by about 0.4 million barrels on the week. PADD 2 crude oil stocks are still showing a huge surplus of 21 million barrels versus last year and 31.6 million barrels versus the five year average. Similarly there is a large surplus in the Cushing area of 18.4 million barrels versus last year and 22.4 million barrels compared to the five year average.

There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to historical normal level of WTI trading at a premium over Brent. The marginal decline in crude oil inventories in PADD 2 and build in Cushing is bullish for the Brent/WTI spread.

Distillate stocks decreased more than the expectations as refinery run rates decreased by 0.9%. Heating oil/diesel stocks decreased by 2.3 million barrels on a week that experienced some winter like temperatures along the highly populated north east. The year over year deficit widened to 19.9 million barrels while the five year average deficit came in around 15.6 million barrels.

Gasoline inventories decreased versus an expectation for a small build. Total gasoline stocks decreased by about 2.8 million barrels on the week versus an expectation for a build. The surplus versus last year turned to a deficit this week of 1.2 million barrels while the surplus versus the five year average for the same week narrowed to about 2.8 million barrels. Gasoline declined slightly in PADD 1 after building for the two previous weeks. PADD 1 stocks (US East Coast) declined 0.2 million barrels this week with the deficit versus last year sitting at 4.5 million barrels and 3.2 million barrels compared to the five year average.

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 for the complex. Overall this week's report was neutral.

I am maintaining my view of WTI at cautiously bearish and maintaining my view for Brent at cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling.

I am maintaining my Nat Gas view and bias at neutral as the weather forecasts and nearby temperatures are supportive. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.

Markets are higher ahead of 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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