A combination of a firming euro (due to no negative news from Europe) coupled with rising equity markets and concerns over the evolving geopolitical risk in the Middle East was enough to push oil prices into positive territory on Wednesday. At the end of the day the API released their weekly report and showed a surprisingly large draw in crude oil stocks (see below for more details...this morning the more widely watched EIA report will be released) giving oil another modest bump up in values. This week has been a solid week of risk on trading pretty much across the board. For the first time in a long time there was not the usual plethora of bearish data or new snippets to derail the short term upward trend currently in place in all global equity markets as well as most all commodity markets...including oil.

If Europe continues to move to the background the run of better than expected macroeconomic data coming from the US coupled with a growing view that China is entering an easy money policy mode (resulting in expansion) will be enough to keep the short term uptrend in place. However, a few days of rising risk asset market values does not make a long term trend but so far this year has proven to be noticeably different than the way 2011 ended. Are the risk asset markets in a transition or is this just another combination of short covering and funds playing catch up that has been driving values higher? It is too early to draw any conclusions yet. All one can conclude at the moment is the short term trend is higher and will remain higher until the next piece of negative news hits the media airwaves...if any.

The global equity markets continued to add value over the last twenty four hours as shown by the EMI Global Equity Index table below. The EMI Index is now up by 3.2% on the week bringing the year to date gain to 6.5%. So far the EMI Index has recovered about 40% of last year's 15.2% yearly loss in less than three weeks. That is a stellar performance but one that is starting to suggest that a correction is approaching. The equity markets are becoming a tad overbought at this point in time and I would not be the least bit surprised to see some sort of downside correction over the next week or so. If so that would likely impact the direction of oil prices as oil has been very tightly linked to both the direction of equity markets as well as the direction of the euro. So far this year both of those external price drivers have been supportive for oil prices. On the geopolitical front the war or words continues surrounding Iran and its nuclear program. The EU is likely to approve the embargo of Iranian crude oil purchases for Europe when they meet on Jan 23rd. The only unknown at this point in time is whether it will be a six month phase in or a three month phase in that the French would prefer. Yesterday China seemed to make it clear they would not be reducing their imports of Iranian crude oil anytime soon further supporting my view that the EU embargo will effectively be a logistics exercise. Iranian crude oil currently going to Europe will head to Asia (China in particular) and other similar grades of Middle Eastern crudes that are going to Asia will be diverted and sent to Europe with Saudi Arabia and other GCC producers making up any shortfall (if any is even needed). The approval of the EU embargo does not warrant a major risk premium in the price of oil. I still do not believe Iran is going to attempt to block the Straits of Hormuz nor if they did try they would be successful for any length of time.

The API report showed a surprisingly large draw in a crude oil along with a much larger than expected build in gasoline stocks. The API reported a large draw (of about 4.8 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports decreased and refinery run rates also decreased by 1.7%. The API reported a large build in gasoline stocks and within the expectations and a modest draw in distillate stocks versus an expected build in inventories.

The report is mixed..bullish for crude oil, bearish for gasoline and about neutral for distillate fuel. That said it is difficult to differentiate whether the gains overnight were from the inventory report (I doubt it) or from the firming euro and positives out of Europe (most likely). The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver. The API reported a draw of about 4.8 million barrels of crude oil with a 0.8 million barrel draw in Cushing and a draw of about 0.2 million barrels in PADD 2 which is negative for the Brent/WTI spread. On the week gasoline stocks increased by about 4.3 million barrels while distillate fuel stocks decreased by about 0.9 million barrels. The more widely watched EIA data will be released this morning at 11 AM. 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 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. 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 keeping 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.