As has been the case for months the oil complex as well as most all risk asset markets continue to be impacted by the 30 second news snippets hitting the media airwaves around Europe. Last week the market sentiment began to start pricing in a soft landing for the European sovereign debt problems including the positive comments that came from the G20 meeting of finance ministers over the weekend. However, the sentiment quickly changed when Germany suggested that the EU was not likely to solve the debt problems by the October 23rd summit in Brussels. Another news snippet that resulted in just about every risk asset market in the world heading lower on Monday and continuing into this morning's trading so far.

Adding to some of the negative sentiment this morning is news that China's GDP dropped to 9.1% for the latest quarter and about 0.4% below the previous quarter as well as below the consensus estimates of around 9.3%. That all said growth is still strong and suggestive that China is heading for a soft landing as the tight monetary policy that has been in place in China for over a year has seemed to finally slow down the growth of this meteoric economy. Obviously a slowing economy in China is directly related to consumption of oil and other major commodities. The latest figures on apparent oil demand for September showed a growth of 2.8 (YOY) to 8.949 million barrels per day or about 9% lower than in August. Again still very robust but consumption is growing at a slower pace as is the Chinese economy.

The oil complex will continue to move on a macro basis with the ups and downs associated with Europe and the macroeconomic data du jour as we have seen over the last forty eight hours. In addition the Brent/WTI spread narrowed significantly as the main driver of this spread since the middle of last week was due to the realignment of several commodity indices. That impact seems to be over for the moment.

With the cloud of uncertainty starting to grow once again global equities moved back to the defensive over the last twenty four hours as shown in the EMI Global Equity Index table below. So far on the week the Index is down by 1.5% with all ten bourses in the Index losing ground over the last twenty four hours. The US Dow...although still the best performer in the Index...has once again moved back into negative territory for the year to date. The 2011 year to date loss has widened to 17.6% with eight of the ten bourses in the Index still showing double digit losses for the year. With global equities a highly correlated leading indicator of the state of the global economy the fragile performance of equities is still very suggestive that the global economic recovery is still very fragile at best. Unlike most of last week equities are a negative driver for oil prices and the broader commodity complex in the short term as the risk off trade seems to be back on the front burner also resulting in the US dollar firming so far this week.
/
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 (driven by Europe)... 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 this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Wednesday morning.
/
My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed report with builds in crude oil and draws in refined products along with a marginal decrease in refinery utilization rates which should result in a mostly neutral 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 draw in gasoline inventories and 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 narrow to about 20.9 million barrels while the overhang versus the five year average for the same week will widen to around 9.4 million barrels.

With refinery runs expected to decrease by 0.2% I am expecting a modest draw in gasoline stocks as demand was likely flat at best last week. Gasoline stocks are expected to decline by about 1.0 million barrels which would result in the gasoline year over year deficit widening to around 9.6 million barrels while the surplus versus the five year average for the same week will switch back to a deficit of around 0.3 million barrels.

Distillate fuel is projected to decrease modestly by 1.2 million barrels on a combination a decrease in production and a possible increase in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.4 million barrels below last year while the overhang versus the five year average will remain around 3.5 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.
/
With WTI still trading back above the $85/bbl level I continue to maintain my bias on the bullish side with a caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data due out this week is negative or if any of the 30 second news snippets surrounding Europe continue to be bearish...especially around the G20 meeting coming up in early November. The oil complex has risen strongly over the last seven or eight trading sessions and is a bit overbought and due for a downside correction. As mentioned above I am starting to view the oil complex as moving back more toward a buy the dip pattern.
/
Although I am still bearish and do expect Nat Gas prices to once again move back and follow the downward underlying trend I am also a firm believer that the market is always telling us what to do and how to trade it. The fact that the market has not declined as a result of bearish data points all last week (culminating in a very bearish injection report) says to me the market is sending a warning signal for now. As such I am moving my guidance back to neutral until additional guidance as to the next directional move becomes much more obvious.

Currently as a new day of trading gets underway in the US 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.