Mixed markets on Tuesday as signals from Europe were more bearish than they have been in weeks putting some pressure on the euro and thus resulting in a variety of equity markets ending the day lower along with oil closing in negative territory. The API data released late yesterday afternoon (see below for a more detailed discussion) was bearish for crude oil and neutral to slightly bullish for products. The evolving geopolitical backdrop surrounding the EU embargo of Iran is acting as a price floor for crude oil as a minimum and offsetting some of the negativity that would come from a 7.3 million barrels build in crude oil inventories. Whether or not the market will be able to discount a large unexpected build in crude oil if a similar result emerges from the more widely EIA report due out later this morning, is an unknown. However, if the EIA data is in sync with the API outcome I would expect to see more selling in crude oil with both WTI and Brent testing their intermediate support levels.

At the moment the global oil system is in the process of re-optimizing itself as those areas of the world that will abide by the embargo on Iranian crude oil purchases look at alternative supply sources. This logistics exercise will continue over the next several months with the net result of Iranian crude not being used in Europe, less in Japan and several other locations while Iranian lifting's likely to increase to places like China and India. Just yesterday the several refiners in India resigned one year supply deals with Iran. Whether or not the market will continue to add a potential supply disruption premium is not know...I do not expect any supply disruption to occur from the action by the US , Europe and others... I still expect the flow to be rebalanced as described above. I also do not expect Iran to take what I would call a very reckless step of trying to block the Straits of Hormuz.

The global equity markets were mixed over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index is still higher by about 0.2% for the week with the year to date gains at 7.7%. Most of the western bourses lost ground yesterday while those markets that are not closed for the Lunar New Year in Asia did gain ground after a blow out earnings report from Apple late in the day in New York on Tuesday. Brazil's equity market has been soaring and remains the number one bourse in the Index with Hong Kong (closed) and Germany not far behind. Equity markets were a neutral for oil and commodities yesterday but have been an upside support for the majority of this year so far. The API report showed a surprisingly large build in a crude oil along with a much larger than expected draw in distillate stocks. The API reported a large build (of about 7.3 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 also decreased by 1.2%. The API reported a modest draw in gasoline stocks and a larger than expected draw in distillate stocks versus an expectation for a smaller draw in inventories.

The report is mixed..bearish for crude oil, neutral for gasoline and bullish 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 build of about 7.3 million barrels of crude oil with a 0.4 million barrel build in Cushing and a build of about 0.4 million barrels in PADD 2 which is positive for the Brent/WTI spread. On the week gasoline stocks decreased by about 0.6 million barrels while distillate fuel stocks decreased by about 2.4 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. 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) 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 a mixed inventory report this week with a modest build in crude oil and gasoline stocks along with an increase in refinery utilization rates. I am expecting a strong build in gasoline inventories and a seasonal draw in distillate fuel stocks as winter like weather did 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 1.0 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 8.4 million barrels while the overhang versus the five year average for the same week will narrow around 9.1 million barrels.

With refinery runs expected to increase by 0.3% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by about 1.7 million barrels which would result in the gasoline year over year deficit coming in around 0.9 million barrels while the surplus versus the five year average for the same week will come in around 5.5 million barrels.

Distillate fuel is projected to decrease by 0.7 million barrels on a combination an increase in production and more 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 18.4 million barrels below last year while the surplus versus the five year average will come in around 0.5 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. 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. However, I am still keeping my view at neutral. I am currently expecting intermediate support around the $97.60/bbl area basis WTI and $109.50/bbl level for Brent with resistance around the $104/bbl level for WTI and $113.75/bbl for Brent. I am keeping my view and bias at neutral primarily because we are in the midst of a modest short covering rally ( as we saw this week so far) as it looks like producers may be starting to shut some marginal dry gas production. 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.

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

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