Yesterday was yet another indication that so much of what has been going on over the last several months is mostly all about Europe. After what seemed to be a successful meeting between Sarkozy and Merkel over the weekend risk asset markets surged on Monday. Asia followed through with equity gains across the board but some profit taking selling starting hitting the market for oil and equities as Europe trading got under way this morning. Uncertainty crept back into the market in Europe as market participants await Slovakia's vote on the bailout fund....which is not a slam dunk. Every day and every step of the way all risk asset markets are continuing to be dominated by each and every news snippet and event happening in and around Europe specifically related to the evolving sovereign debt issues and the recapitalization of the European banks. After the euphoria in the markets on Monday the reality of the details still remain in Europe before the 17 nation euro zone can emerge with a long lasting solution to the debt issues. As of this writing oil and equities are giving back some of yesterday's gains while the US dollar is back in positive territory.

For the next several weeks the vast majority of the significant moves in oil and other risk asset markets is going to be about Europe and to a lesser extent about the Us economy. At least through yesterday market participants have started to believe that it could be possible that Europe may be able to come up with a durable and long lasting solution. However, between now and when a solution finally emerges there will be many bullish and bearish headlines surrounding Europe that the markets will be trading on. We can expect high volatility and sudden price directional changes over the next several weeks with the major event coming on or near the G20 meeting on Nov 3rd. Until then market action is best viewed from a very short term
perspective with longer term or an investing mentality still a very difficult and risky approach to the market at this point in time.

Over the last twenty four hours the global equity markets have been able to muster enough of a gain to move the EMI Global Equity Index back out of bear market territory (at least for now). The major gains came during yesterday's trading in the US and Europe. Overnight Asia put in a mixed performance and as mentioned above Europe and US equity futures are giving back some of yesterday's gains ahead of Slovakia's vote for the bailout fund in the EU. The Index is currently up by 2.1% for the week narrowing the year to date loss to 18.2% and 1.8% below the 20% bear market threshold. Seven of the ten bourses in the Index are still showing double digit losses with the US Dow continuing to show the best performance of all of the bourses and currently just 1.2% from going into positive territory for the year to date. So far this week equities have been mostly a positive driver for oil prices.

On the fundamental side of the market Libyan oil production is now back to about 300,000 to 400,000 barrels per day with another increase expected before the end of the year. The CEO of Total indicated today that he expected full production to be achieved by the end of next year. In other news Shell declared force majeure on its Forcados production for the last three months of the year due to pipeline sabotage. Shell also lifted its force majeure on Bonny Light production resulting in somewhat of a wash of total production of both of these two grades.

Today both the IEA and the EIA will release their monthly oil forecasts while the EIA will also release their Winter Outlook in conjunction with their Short Term Energy Outlook Report. The markets will be looking closely at both the EIA and IEA forecasts today insofar as their forecast for oil demand growth going forward. Both agencies have been slowly lowering their forecast over the last three or so months as the forecasts for global economic growth continues to slow down. With the macroeconomic data over the last few weeks not as bad as expected in the developed world I would expect both forecasting agencies to actually hold their oil demand forecasts steady (or about the same as last month's report) for this round of reports.

With Europe still in a state of turmoil and uncertainty it is not clear if this week's oil inventory reports will have any major impact on price direction. At the moment all market participants are continuing to follow the tick by tick direction of equities and the US dollar... as they are both the primary price drivers for oil. As such this week's oil inventory report is likely to 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. The normal weekly reports get underway late tomorrow afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Thursday morning. The data has been delayed one day due to the Columbus Day holiday in the US on Monday.
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My projections for this week's inventory reports are summarized in the following table. I am expecting an across the board build in inventories and a marginal decrease in refinery utilization rates which should result in a negative or mildly bearish weekly fundamental snapshot. I am expecting a modest build in crude oil stocks with a decrease in refinery utilization rates. I am expecting a modest build in gasoline inventories and a smaller build in distillate fuel stocks. 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 deficit of crude oil will still widen to about 22.2 million barrels while the overhang versus the five year average for the same week will narrow to around 8.1 million barrels.

With refinery runs expected to decrease by just 0.2% I am expecting a modest build in gasoline stocks as demand was likely flat at best last week. Gasoline stocks are expected to build by about 0.8 million barrels which would result in the gasoline year over year deficit narrowing to around 3.6 million barrels while the surplus versus the five year average for the same week will also narrow to about 5.6 million barrels.

Distillate fuel is projected to increase modestly by 0.2 million barrels on a combination an increase in production and a possible decline in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 15.1 million barrels below last year while the overhang versus the five year average will remain around 7.8 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 experienced an across the board decline in inventories including a strong decrease in refinery run rates. Thus based on my projections the comparison to last year will result in a modest level of restocking for crude oil and gasoline but distillate fuel oil stock would remain steady versus last year for the same week.

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With WTI still trading above the $80/bbl level I have to keep my bias to the bullish side with a big caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data (jobs data in particular) due out this week are negative or if any of the 30 second news snippets surrounding Europe are bearish.

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With the short term weather forecast at neutral at best and with yet another forecast for a bearish EIA inventory report this week I have to keep my drivers at bearish. The current price remains well below the newly anointed resistance level of $3.61/mmbtu as it moves closer to the next stopping point from a technical perspective of around $3.40/mmbtu. The short term temperature forecasts as well as the tropics continue to be a neutral at best for prices in the short term. We are still a bit too far away from any serious winter heating demand and thus with little expected impact on demand over the next month or so I continue to expect the weekly inventory injection reports to outperform both last year and the five year average for the same week.

Currently as a new day of trading gets underway in the US markets are mostly lower as a bit if profit taking selling takes hold as shown in the following table.

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