Although it looks like the oil market is heading for its third weekly gain in a row the market has been retracing in overnight trading. The spot WTI contract remains above its breakout level of $95/bbl which was breached earlier in the week while the rest of the complex is hovering very close to it range support level. The oil complex remains in a battle between faltering oil demand growth and the support coming from the very easy monetary policies in many areas of the global economy.

The spot Brent/WTI contract has gone through a light short covering rally since yesterday as the spread is now back above the $8/bbl level and appearing like it is setting up for a test of the $8.25/bbl resistance level. The spread traded down to the mid-$7's yesterday before finding some light buying support. The market is weighing the bearish impact from the crude oil inventory destocking pattern currently in play in Cushing (I expect Cushing stocks to decline again in next week's report) versus what could be some supply issues coming up in the North Sea as scheduled maintenance gets underway. At the moment the market sentiment is still toward the narrowing mode but as we saw in yesterday's trading the downside momentum is starting to slow.

Global equity markets have continued to add value with Japan surging overnight as shown in the EMI Global Equity Index table below. The Japanese bourse increased by almost 3 percent as the Yen weakened to the lowest level since April of 2009 after a government report showed Japanese investors increased holding of overseas bonds for the first time since January of 2010. The Japanese bourse is now showing a 40.5 percent gain for the year. The weak Yen is a major support for this export driven economy. The EMI Index is heading for the second weekly gain in a row and is currently near the highest level of the year. Global equity markets have been a positive price driver for the oil complex this week.

OPEC released their monthly oil repot this morning. They did not follow the EIA in lowering oil demand for 2013 rather they kept it at the same level as in their last monthly forecast. Following are the main highlights form the OPEC projections.

• World oil demand growth in 2013 remains unchanged from the previous report at 0.8 mb/d, broadly in line with the estimate for 2012. However, the performance of the first quarter of this year has been revised down based on actual data. A large portion of the growth is seen coming from China, with a 0.4 mb/d increase. The other non-OECD countries are expected to add some 0.8 mb/d, with the Middle East region accounting for around 0.3 mb/d, followed by Other Asia and Latin America with growth of about 0.2 mb/d each. In contrast, OECD demand is expected to see a contraction of around 0.4 mb/d, which is slightly less than in 2012

• Non-OPEC supply is forecast to grow by 1.0 mb/d in 2013, following an increase of 0.5 mb/d in 2012, broadly unchanged from the previous report. OECD Americas remain the driver of growth in 2013, while OECD Europe is seen experiencing the largest decline. OPEC NGLs and nonconventional oils are expected to increase by 0.2 mb/d in 2013. In April, total OPEC crude oil production, according to secondary sources, was estimated to average 30.46 mb/d, an increase of 0.28 mb/d over the previous month.

• Product markets continued losing ground in April due to sharp declines in light and middle distillate cracks, which have been pressured by rising supplies along with weaker demand worldwide. In Asia, refinery margins fell mostly for the top of the barrel. US margins experienced a strong correction due to the recovery in WTI prices. In Europe, the drop in the Brent price allowed European margins to recover, despite weak market fundamentals due to lackluster domestic demand.

• OECD commercial oil stocks fell marginally in March, remaining in line with the five-year average. Crude stood 19.0 mb over the seasonal average, while products indicated a deficit of about the same amount. In terms of forward cover, OECD stocks stood at 59.1 days, some 1.3 days above the five-year average. Preliminary data shows US commercial stocks rose by 20.0 mb in April. This indicates a surplus of 42.0 mb compared to the seasonal average, with the bulk coming from crude.

• Demand for OPEC crude in 2012 is estimated at 30.2 mb/d, following an upward revision of 0.1 mb/d from the previous report and broadly unchanged compared to the previous year. In 2013, demand for OPEC crude is expected to average 29.8 mb/d, representing an upward revision of 0.1 mb/d from the previous report and a 0.4 mb/d decline from last year.

I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. On the other hand the market has been pushing oil and other commodity values higher as more liquidity from advanced country central banks continues.

I am maintaining my view at neutral for Nat Gas and keeping my bias at cautiously bearish as lower prices may still be in the cards. The fundamentals are less supportive after last week's inventory snapshot.

Yesterday's EIA report was bearish versus the market consensus and bearish versus the historical data… bearish compared to last year and the five year average. The report showed a net injection that was above the market expectations and greater than last year and the five year average net injection for the same period. The 88 BCF injection (above normal for this time of the year) was modestly above the market consensus calling for an injection of around 83 BCF. The build of 88 BCF was above my model forecast (75 BCF injection) this week. The year over year inventory situation remains in a strong deficit position versus last year but has narrowed this week as did the deficit versus the more normal five year average. The current inventory deficit came in at 99 BCF versus the normal five year average or about a negative 5 percent.

This week's 88 BCF injection compares to a 30 BCF injection into inventory last year and an injection for the five year average of 69 BCF for the same week.

Markets are mostly lower ahead of the US trading session as shown in the following table.

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy.

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