The oil complex is slightly higher ahead of the US trading session. Overnight trading was quiet with some positive economic data out of the UK and Italy offset a tad by the Libyan government indicating that production increased a bit although the main terminal remains closed. Output out of Libya is still less than half of normal as labor disputes have shut a major portion of the oil sector down.

This week the three main forecasting agencies will release their monthly oil market assessments. The EIA report will hit the media airwaves early this afternoon while both the OPEC and IEA reports will be released on Friday. I am expecting all of the reports to show no change in oil demand growth projections as the US economy is improving slightly but still offset by the ongoing recession in Europe and slower than expected economic growth out of China.

The Brent/WTI spread is narrowing on news that Cushing stocks likely decreased again this week coupled with the restart of the North Sea Pipeline System following planned maintenance along with oil flowing once again from the Buzzard field with exports just starting with full capacity expected over the next several days. The spot spread seems to be settling into a trading range bounded by parity on the support side and about $2.50/bbl on the resistance side. The spread still remains in the long term narrowing trend that has been in play since early February of this year with bouts of short covering hitting from time to time.

As I have been indicating for months the spread remains in a longer term narrowing trend that has been in play for most of this year. Crude oil stocks in Cushing and the broader PADD2 region of the US have been in a strong destocking pattern and are likely to remain in this pattern for the short to even medium term. The spread will trade at parity with a strong possibility of WTI trading at a premium to Brent on a consistent basis sometime over the next several months.

Global equities lost value over the last twenty four hours. The EMI Global Equity Index declined by about 0.15 percent with the stimulus supported developed world bourses continuing to lead the Index while the developing world markets are still struggling. That said China's bourse has increased consistently for the last week or so and could finally be turning the corner as many participants are starting to view the Chinese economy as one that is starting to stabilize. Japan remains on top of the leader board while Brazil continues to be the main laggard in the Index. Global equities were a neutral for the oil complex as well as the broader commodity complex over the last twenty four hours.

This week's round of oil inventory reports will follow its normal schedule with the API data being released on Tuesday afternoon followed by the EIA report hitting the media airwaves at 10:30 am on Wednesday. My projections for this week's inventory report are summarized in the following table. I am expecting another modest draw in crude oil inventories with a build in both gasoline and distillate fuel stocks.

I am expecting crude oil stocks to decrease by about 0.8 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 6.1 million barrels while the overhang versus the five year average for the same week will come in around 19.1 million barrels.

I am expecting crude oil stocks in Cushing, Ok to decrease this week and continue its destocking trend. This will be bearish for the Brent/WTI spread as the fundamentals are in play and are driving the spread (see above for a more detailed discussion).

With refinery runs expected to decrease by 0.2 percent I am still expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 0.5 million barrels which would result in the gasoline year over year surplus of around 17.9 million barrels while the surplus versus the five year average for the same week will come in around 11.2 million barrels. With a major portion of the US summer driving season already in the history books gasoline supplies will be more than adequate going forward as total gasoline stocks remain well above both last year and the so called normal five year average.

Distillate fuel is projected to decrease by 0.5 million barrels as exports of distillate fuel out of the US Gulf remains robust. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 2 million barrels above last year while the deficit versus the five year average will come in around 23.3 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's inventories are mixed with some differences compared to last year's changes. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for most everything in the complex.

I am maintaining my view at neutral keeping my bias at cautiously bullish for the short term as the downside correction seems to be over for now. The strong destocking pattern of crude oil in the US Midwest is also acting as a supporting catalyst for the entire complex.

I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture has shifted as the temperatures across the US do not appear to be moving back to warmer than normal weather anytime soon.

Markets are mostly higher heading into the US trading session as shown in the following table.

Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.

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