Oil continues to be primarily driven by the geopolitical events unfolding around the Mideast with Iran in the forefront. On the other hand the never ending postponement of the Greek bailout funds has been acting as a bearish indicator for most risk asset markets while capping yesterday's price rise in oil. The war of words between Iran and the west ratcheted up a notch yesterday with conflicting reports coming out of Iran. One indicating that the Iranian government is now embargoing six EU nations immediately but later denied by the Iranian Oil Minister. That was enough to keep oil prices firm even though it is becoming less significant. In fact France (one of the nations supposedly embargoed by Iran) has already stopped using Iranian oil and has completed its switch to other grades of crude oil. The other five nations are well on their way to rebalancing their systems with alternative crude oil slates making any action by Iran to speed up the EU embargo of purchasing Iranian crude oil less important.

Iran's President also spoke and presented his so called major announcement in the nuclear area yesterday which was played down by the US & west as nothing but hype and an exaggeration to bolster Iranian nationalism amid the more restrictive sanctions that are supposedly starting to impact Iran. A former international weapons inspector in Iraq said that the announcement shows Iran is way behind and they are currently trying to play catch-up suggesting that their audience was more domestic rather than international in the speech. From the comments out of the west it seems Iran is not really any closer to having the ability to build a nuclear weapon.

Whether or not that turns out to be enough for the Israeli is a big question mark. The potential threat of military action by the Israelis is a big a wild card as much as the Iranian nuclear projects themselves. Finally the EU did acknowledge that it has received a letter from Iran's main nuclear negotiator about resuming talks with the west. We will have to see if talks resume anytime soon and more importantly if they turn out to be more productive than any of the previous talks over the last five years or so. Iran remains the main price driver for oil and will continue to act as a price floor as a minimum while causing sudden price spikes when the war of words heats up as we have seen over the last week or so.

On the other end of the spectrum the ongoing and evolving sovereign debt issues in Europe and in particular Greece have been acting as a bearish risk asset market price driver for the last few days as a Greek deal is still not done and the bailout funds have still not been released. The main creditor countries seem to be having second thoughts on control after Greece's dismal performance over the last several years. The creditor countries are trying to get more control over how the bailout funds are spent and it is thus holding up the final deal that all thought was final last week.

As I have been saying for weeks Greece 's economy is a mess and even when the current round of bailout funds are approved I still think Greece has a high probability of default and expulsion from the EU. It seems to me that the EU leaders likely feel the same way and thus the reason why it is taking so long for this deal to be finalized. One possible thought is they are trying to set up Greece for a more orderly default. Whatever the outcome... it is currently a negative for most risk asset markets and absent the geopolitics surrounding Iran oil prices would have followed the pattern of most of the other global risk asset markets... lower over the last day or so.

Another sign that the world's main economic growth engine ...China is continuing to slow hit the media airwaves overnight when foreign direct investment declined for the third month in a row in January. FDI declined by 0.3% year on year. For now the government has not yet become aggressive with easing its monetary policy after the surprise increase in inflation in January. It is clear that the Chinese economy is slowing and I am certain this is raising major concerns in government circles. They will embark on an easing policy... it is simply a matter of when and how aggressive they get as inflation could be an issue once again.

With China and other emerging market country economies clearly slowing it is adding to the slowing growth pattern that is emerging every day in the developed world economies. In the western economies inflation is also becoming a problem as countries like the US. Japan and the UK continue to flood the market with liquidity in an effort to stimulate their economies. This action by the central banks certainly has inflationary implications. The exposure of higher oil and commodity prices are starting to work their way through the system as we have seen during the month of January. This global slowing is also finally starting to have an impact on the market sentiment of the global equity markets.

The global equity markets may be in the early stages of a downward correction as shown in the EMI Global Equity Index table below. As I have been mentioning for the last few weeks the global equity markets are very overbought and susceptible to a modest round of profit taking selling. We may have seen the start of that yesterday and into this morning so far. How deep it becomes and how long it even lasts is certainly an unknown. The EMI Index is down marginally over the last twenty four hours resulting in the week to date gain narrowing to 1.6%. What we have seen so far is a very minor round of profit taking selling and by no means has it changed the fact that the market remains very overbought at current levels. We will have to keep this on the radar if the selling accelerates it could have a negative impact on the direction of oil prices irrespective as to what is going on in the Middle East in the short term. Yesterday's EIA inventory report was mixed to slightly bullish as it showed a surprise decline in total stocks, a surprise decline in crude oil stocks. a larger than expected draw in distillate fuel inventories and a smaller than projected build in gasoline stocks. Implied demand increased strongly as refinery utilization rates increased on the week to 84% of capacity an increase of 1.2% in refinery run rates. 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 modestly on the week by 4 million barrels after increasing over 3.8 million barrels the previous week. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 46th week in a row versus the previous year. The year over year deficit came in at 14 million barrels while the surplus versus the five year average for the same week came in around 24.5 million barrels. Crude oil inventories decreased versus an expectation for a modest build. With a decrease in stocks this week the crude oil inventory status versus last year is now showing a deficit of only around 6.8 million barrels while the surplus versus the five year average for the same week narrowed to around 7.3 million barrels. PADD 2 crude oil inventories increased by about 0.4 million barrels while Cushing, Ok crude oil inventories increased by about 2.0 million barrels on the week.

Crude oil inventories in the mid-west region of the US have been in a decline and are still at levels not seen since 2010 when the Brent/WTI spread was trading at significantly lower levels. However, the modest increase in inventories this week coupled with the evolving geopolitical events surrounding Iran have all contributed to the Brent/WTI spread widening on the week.

Distillate stocks decreased modestly versus an expectation for a smaller seasonal draw. Heating oil/diesel stocks decreased by only 2.9 million barrels. The year over year deficit came in around 17.6 million barrels while the five year average surplus narrowed to about 0.6 million barrels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season starts to get much colder the current level of exports will likely continue especially with the cold spell in Europe.

Gasoline inventories built declined marginally as a result of all of the unscheduled refinery issues of late. Total gasoline stocks decreased by about 0.2 million barrels on the week versus an expectation for a build of about 0.3 million barrels. The deficit versus last year came in at 8.9 million barrels while the surplus versus the five year average for the same week held steady at about 2.9 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 but one that is biased to being marginally bullish on the week. WTI is still trading above its intermediate support level and seemingly settling in to a $97 to $102/bbl trading range. Brent has also breached its resistance level with a path that could possibly take it to the $120/bbl level. But as with WTI... Brent is also settling into a new short term trading range of around $116/bbl to $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 still susceptible to a modest round of 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.

This morning the EIA will release the weekly Nat Gas inventory report at 10:30 AM EST. This week I am projecting a net withdrawal of 113 BCF which is significantly below both last year and the five year average for the same week. My projection for this week is based on a week that experienced unseasonably mild weather (for most of the week) over a major portion of the country as shown in the following table. My withdrawal forecast is based on the fact that heating related demand was below normal last week in most parts of the country. My projection will be below last year's net withdrawal level of 230 BCF and below the normal five year average net withdrawal for the same week of 178 BCF. Bottom line the inventory surplus will build again in this report period with the surplus versus history coming in over 800 BCF versus last year at this time.

Currently markets are mixed as shown in the following table.

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