Crude oil continued its push lower on Wednesday as the spot WTI contract moved modestly below the lower end of the short term trading range as market participants discounted the surprise draw in crude oil (see below for a more detailed discussion on this week's inventory report) as being a result of a larger than normal decline in imports which is likely to return to more normal levels in the next week or so. In addition to the negativity that emerged after the EIA inventory report the oil and broader risk asset markets were already under pressure as protests were underway in both Spain and Greece over the populace's objections to the austerity programs. The actions in Europe yesterday were a reminder to the market that all is just not yet well in Europe and the evolving sovereign debt issues that have been plaguing the EU for well over three years are still fueling the cloud of uncertainty.

In overnight trading that has been a small rebound in oil prices as well as in the broader risk asset markets as a light round of short covering has emerged pushing the spot WTI contract back over the $90/bbl level. At the moment the negative tailwinds have been overtaking the more bullish headwinds for most of the trading week so far. The slowing of the global economy combined with an ample supply of crude oil in the near term along with global oil consumption slowing is more than offsetting the potential for an inflation fueled outcome from the new and expanded round of quantitative easing in the US, UK and Japan coupled with the bond buying program announced by the ECB. The reality of the state of the state of the global economy is currently offsetting the perception view of what more stimulus might do to the economy. At the moment the market sentiment is becoming more biased to the downside ... at least for crude oil.

On the refined products front the underperformance of both gasoline and distillate fuel inventories versus last year and the five year average has resulted in the deficit in inventory continuing to widen for both of these oil products. The plethora of refinery issues of late... including the issue at Irving's St. John refinery on Wednesday has contributed to the strong short covering rally in RBOB gasoline yesterday. Refined product inventories are at the lowest level in quite some time. However, the fact that oil consumption in the US is continuing to decline is offsetting some of the bullishness coming from the supply side of the equation. That said in the oil complex crude oil will underperform the most in down legs while refined particular RBOB gasoline will outperform in up legs in the short term.

After losing value in the US trading session global equities have been experiencing a modest recovery over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index recovered about 0.25% of its value over the last twenty four hours resulting in the weekly loss narrowing to 2%. The Index is still showing a year to date gain of 7.8% with Germany still at the top of the leader board. Global equities most risk asset markets have been under pressure this week as market participants have moved from the perception mode of what stimulus program might do back the reality of the fact that the global economy is still weakening and Europe's debt problems are still looming.

Wednesday's EIA inventory report was somewhat bullish across the board from the perspective of inventories declining across the board. However, there were a scattering of bearish elements in the report like another decline in demand and what seems to be a temporary reduction in crude oil imports that have more than offset the bullish macro view. Overall I would categorize the report as biased to the neutral to bullish side as total commercial stocks decreased modestly as did crude oil inventories mostly related to a large reduction in crude oil imports. Refinery utilization rates declined on the week down to 87.4% 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 decreased by 2.7 million barrels after increasing by about 11.4 million barrels the week before. So far the recovery in total commercial stocks over the last three week is still greater than the loss of stocks due to the storm by about 1 million barrels. The year over year surplus widened to 25.8 million barrels while the surplus versus the five year average for the same week narrowed to 46.3 million barrels. By all measurements total oil supply in the US is still well balanced to surplus irrespective of the evolving geopolitical risk in the Middle East.

Crude oil inventories decreased (by 2.4 million barrels) and versus an expectation for a modest build. 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 decrease in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 26.2 million barrels while the surplus versus the five year average for the same week came in around 36.4 million barrels. Crude oil imports increased strongly on the week after also increasing last week.

PADD 2 crude oil inventories increased by about 0.3 million barrels while Cushing, Ok crude oil inventories decreased by about 0.1 million barrels on the week. 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 running at over 90% of capacity (temporarily lower from Isaac). The small increase in crude oil inventories in both PADD 2 and Cushing are neutral for the Brent/WTI spread. The Nov spread is trading at near the $20/bbl level.

Distillate stocks surprisingly decreased (versus and expectation for a build) as after refinery run rates declined by 1.5%. Heating oil/diesel stocks decreased by 0.5 million barrels. The year over year deficit came in around 29.9 million barrels while the five year average remained in a deficit of about 25.4 million barrels.

Gasoline inventories surprisingly decreased as many in the market were expecting a small seasonal build. Total gasoline stocks decreased by about 0.5 million barrels on the week versus an expectation for a build of about the same size. The deficit versus last year came in at 18.2 million barrels while the deficit versus the five year average for the same week was about 8.8 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 inventories for everything other than Jet fuel was bullish on a macro or inventory draw while Jet Fuel was neutral to bearish. while distillate and gasoline were neutral to bullish. Overall this week's report was marginally biased to the bullish side as total stocks are once again back to declining.

Oil has become more reasonably valued after about a 10% downside correction (basis WTI). WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. Both crude oils are now trading at the lower end of the trading range and if solidly breached to the downside we could see an expansion of the range over the next few days. With the bearish current fundamentals and the slowing of the global economy driving price the bias is to downside in the near term for crude oil but to a lesser extend for refined products based on the profit taking selling that started late last week.

I am keeping my view at neutral with a bias to the upside as the industry is back to normal operations after Isaac but the market is trading based on a perception of what the upcoming winter may do to Nat Gas related demand. At current prices the economics now favor coal over Nat Gas and there are no major weather pulls on demand.

Markets are mostly 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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