Oil was able to fight off the early morning bearish sentiment on Monday after China lowered its GDP projection and ended the day in positive territory. Geopolitics continue to dominate any other price driver including China's economic growth forecast. On Monday Presidents Obama and Netanyahu met and as has been the case the meeting seemed cordial enough but there still is a difference of opinion on how to handle Iran's nuclear ambitions. As President Obama clearly outlined in his Sunday speech to AIPAC he is more interested in focusing on sanctions and diplomacy and allowing them to work for a period of time. On the other hand President Netanyahu agreed with Obama but clearly stated that Israel will be the master of its fate or in other words Israel has a right to defend itself, by itself against any threat irrespective of the US approach.

I view the outcome of the meeting as biased to the bullish side for oil prices as it suggests to me that we are slowly moving into my scenario 2 described last week...the threat of a military intervention by Israel against Iran or a preemptive strike by Iran on Israel is increasing. It will be very interesting to see if Iran reacts to the US-Israeli meeting. If Iran hangs out an olive branch ...like moving closer to a resumption of negotiations certainly oil prices will decline. I do not think Iran will buy the official rhetoric from the meeting saying that diplomacy and sanctions are first and foremost. I believe Iran will focus more on the military options part of the meeting and may not quickly rush to the negotiating table. If that turns out to be the case then oil prices are likely to work their way back to the upper end of the trading range...about $110/bbl basis WTI.

Today the EIA will release their monthly Short Term Energy Outlook report. The IEA will release their monthly oil assessment next week (3/14). I expect both agencies to lower their demand growth forecast once again based on the main growth engine of the world lowering their GDP forecast yesterday...China and the disappointing GDP numbers out of the EU this morning. Oil demand is slowing along with the slowing of the global economy. Under normal circumstances this would be a bearish signal for oil prices. However, the recent rise in prices have not been demand driven rather it has been all about supply or better said the potential for a supply interruption especially from the oil rich Middle East.

So far March has finally caught the attention of global investor and traders to the simple fact that the global economy is slowing and high oil prices are fueling inflation risk and thus acting as a negative for global equity markets. Today another data point supported the slow growth scenario after the EU statistics office announced that fourth quarter EU GDP declined by 0.3% versus the third quarter. In addition fourth quarter investment plunged, consumer spending declined and exports fell by 0.4% after gaining the previous three months. The economic roundup in Europe today certainly does not sound like an economy that is expanding nor is it an economic picture that supports the surging equity values so far this year.

Yesterday it was China that announced a slowing of its economy, today it is Europe and the US will get center stage on Friday when the US Labor Department releases the latest non-farm payroll data and the headline unemployment number. The market consensus is calling for a net 220,000 gain in total jobs with the unemployment rate holding steady at 8.3%. Certainly any variation to the forecasts will result in a swift reaction in the markets. So far most all risk asset markets...including oil are trading in negative territory after the disappointing data about of Europe. Oil and global equity markets have been in an overbought mode for weeks. Market corrections generally need a catalyst to change the market direction. The plethora of data suggesting a slowing of the global economy may be the catalyst that seems to have started the downside correction that has been in place for most of the month of March (so far).

For the first time this year all ten bourses in the EMI Global Equity Index (table shown below) are in negative territory for the day (so far). The EMI Index is lower by 1.8% for the week narrowing the year to date gain to 13.1%. The big gainers are the bourses that are getting hit the hardest at the moment...Brazil, Germany and Hong Kong. It is still difficult to tell whether the current round of profit taking selling will be shallow and short in duration as has been the case for all of 2012 or if this is the start of what many are expecting to be a much deeper correction in the order of 5 to 7%. Although the evolving geopolitics of the Middle East continues to be the main price driver for the oil complex as a secondary price driver global equities (the surrogate for the global economy) are bearish for oil prices so far this week. This week's oil inventory reports will be released on their normal schedule. The API data will be released on Tuesday afternoon while the EIA data will hit the media airwaves at 10:30 AM EST on Wednesday. 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) and to a secondary extent based on 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 news snippets out of the Middle East and the tick by tick direction of equities and the US dollar (driven by Europe & China so far this week)... 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 a decline in gasoline stocks along with a modest seasonal decline in distillate stocks along with a small increase in refinery utilization rates. I am expecting a draw in gasoline inventories and a normal draw in distillate fuel stocks as winter like weather hit parts of the US during the report period...in particular the east coast. I am expecting crude oil stocks to increase by about 1.4 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 2.6 million barrels while the overhang versus the five year average for the same week will widen to around 1.5 million barrels. Even with refinery runs expected to increase by 0.3% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 1.5 million barrels which would result in the gasoline year over year deficit coming in around 0.8 million barrels while the deficit versus the five year average for the same week will come in around 6.3 million barrels.

Distillate fuel is projected to decrease by 2.0 million barrels on a combination of steady exports and a bit of colder than normal weather last week. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 15.8 million barrels below last year while the surplus versus the five year average will come in around 1.4 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 the inventory changes were in the same direction as the projections except last year experienced much larger declines in both gasoline and distillate fuel stocks versus the projections for this report. As such if the actual data in line with the projections there will be modest changes in the year over year comparisons for most everything in the complex except for crude oil inventories. WTI is still trading above its most recent support level of $104/bbl with $110/bbl the next level of resistance. Brent is also still above its support level of $120/bbl. Oil continues to be driven by the evolving geopolitics of the Mideast...in particular Iran with just about all of the other normal prices drivers taking a secondary role...including fundamentals. I am keeping my view at cautiously bullish and keeping the caution flag flying to remind all that the market is remains susceptible to further profit taking selling in the short term. I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. 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 mostly lower as shown in the following table.

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