This week has been mostly about easy money as China, ECB and BOE, Denmark all embarked on monetary policies to try to jump start their respective economies. The global economy is slowing and all macroeconomic data over the last several months have supported that view. With the June event calendar now in the history books yielding a EU Ministers deal that is yet to be detailed the market has refocused its attention to the main headwind that has been looming over the all markets... the snail's pace growth of the global economy with pockets of recession already appearing in some areas of the world (several EU countries).

With global oil demand just about entirely centered in the emerging market world the market has not placed much emphasis on a 25 basis point rate cut in the EU and additional QE in the UK as this region of the world is forecast to show another decline in oil consumption in 2012 and the magnitude of the ECB action is not likely to result in a major growth spurt of the EU economy nor a sudden turnaround in oil consumption in this region of the world in the short term. All of the energy sensitive economic data like PMI data out of Europe suggests that the downturn in the EU economy is deepening and not anywhere near turning around at this point in time.

As I discussed a few weeks ago the bearish macroeconomic data out of China...especially manufacturing and exports were likely the motivation by the Chinese government to cut short term interest rates for the second time in a month. The benchmark one year lending rate was cut by 0.31% while the one year deposit rate was cut by 0.25%. The aggressive action by the government is a bit of a double edge sword in that yes it shows that the government is taking action to try to jump start this meteoritic economy but on the other hand the fact that the government cut interest rates twice in one month suggests that the economic slowdown in China could be a lot deeper than many had previously thought. With a turnover of power in China in the fall I would expect that the current leaders will continue to try to get the economy on a growth path before the power transition takes place.

Whether or not the current action in China will result in a short term turnaround is certainly the question that many in the market would very much like to know. The way the markets have reacted to the monetary action over the last twenty four hours suggests to me that there is skepticism that the worst is over for the Chinese economy. As such the likelihood of oil demand growing at an accelerated rate in the short to medium term is also far from a given and thus the reason why oil prices have been drifting lower since the announcement by the Chinese government.

Moving back to the developed world the market remains on payroll watch in the US as the monthly nonfarm payroll data gets released this morning at 8:30 AM EST. After last month's US Central Bank meeting the Chairman seemed to put a lot of emphasis on the faltering employment situation in the US and many in the market view the next two months of nonfarm payroll data as very important in the decision making process by the FOMC in deciding whether or not to embark on a new QE3 program when they meet in August. The market is in a mode of bad employment data may be good news for the markets as it suggests that QE3 may be more likely while a good data point could result in a bit of a sell-off in risk asset markets as the market interprets it as a lower chance of a new QE program in August.

The market consensus for today's payroll data is around 125,000 new net jobs created in the month of June with the headline unemployment rate expected to hold steady at 8.2%. The last several months have come in below the consensus and most importantly the market will be looking to see if this trend continues. In addition the government will not only release the June data but as they do every month they will revise the previous months. Again the market will be looking very closely to see if the revisions are downward or upward. An underperformance of June data versus expectations along with a downward revision in the previous months will certainly bring out the QE traders in full force today as the view that the US Fed will embark on QE3 will increase...especially after the easing action by China, EU, UK and Denmark over the last twenty four hours.

The global equity markets have been recovering since last week's EU deal as shown in the EMI Global Equity Index table below. The Index is currently up by 2.2% for the week with the year to date gain at 2.3% with Europe and the west still to trade for Friday. The Index has gained ground for the last two weeks in a row with eight of the ten bourses in the Index now in positive territory for 2012. Germany continues to hold the top spot in the Index with a double digit gain for the year as a weak euro has been a positive for this export oriented economy. Global equity markets have made a strong recovery since the EMI Index hit its lows for the year in early June. However, even with the Index in positive territory it is still significantly off of its highs hit back in the middle of March. The way the global equity markets have traded over the last twenty four hours suggests that the market is not yet convinced that the easy money actions are going to have a material impact on the condition of the global economy in the short to medium term.
Certainly the action by several central banks will eventually impact the various economies of the world. However, the impact could be minimal and most definitely it will not happen overnight. In fact I suspect there will be more actions over the next several months by China and possibly the US as discussed above. Much of the economic data is lagging and for the next month or two the data will not likely show any impact from the new round of easing. As such market participants will likely move into a perception trading mode as we have seen several times since the start of the financial crisis back in 2008. As the market digests all of the actions by the various central banks and as the details of the EU deal become much clearer we could get a bit of a delayed reaction to all of the actions of late and could see most risk asset market entering into a perception rally that could take them back in the direction of the levels they were at during the first quarter of the year. Based on all of the actions I would now say that the global risk asset markets are more likely to stabilize and even start a slow movement to the upside as more and more participants recognize that the Central Banks will continue to try to inflate their way out of the current slowdown.

Wednesday's EIA inventory report was mostly bullish after a modest decrease in total stocks, another surprise draw in distillate fuel stocks along with a larger than expected draw in crude oil inventories, and a small build in gasoline stocks. Total implied demand increased strongly for the second week in a row with gasoline demand leading the way higher (ahead of the US holiday this week). Refinery utilization rates decreased modestly on the week to 92% of capacity a decrease of 0.6% 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 by 4.1 million barrels after increasing modestly the week before. The year over year surplus narrowed to 32.5 million barrels while the surplus versus the five year average for the same week narrowed to 41.3 million barrels. By all measurements total oil supply in the US is still well balanced to comfortable irrespective of the evolving geopolitical risk at the moment.

Crude oil inventories decreased (by 4.3 million barrels) versus an expectation for a modest draw. Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. Even with a decrease in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 24.3 million barrels while the surplus versus the five year average for the same week came in around 40.8 million barrels. A portion of the draw this week is a result of the tropical storm that hit the US Gulf during the report period resulting in LOOP closing down and some production shut ins for preemptive reasons. Crude oil imports also declined strongly. We could see a larger than expected increase in imports and crude oil production in next week's inventory report.

PADD 2 crude oil inventories decreased by about 1.0 million barrels while Cushing, Ok crude oil inventories increased by 0.2 million barrels on the week. Crude oil inventories in the mid-west region of the US are still hovering near record high levels even as the Seaway pipeline is now pumping oil out of the region as well as an increase in refinery run rates. The decrease in crude oil inventories from the region this week is bearish for the Brent/WTI spread. However, the spread has been widening the last week on a combination of the Norwegian oil workers strike and the Iranian oil embargo.

Distillate stocks decreased versus an expectation for a modest seasonal build. Heating oil/diesel stocks decreased by 1.1 million barrels. The year over year deficit came in around 24.3 million barrels while the five year average remained in a deficit of about 23.3 million barrels. The major reason for the underperformance in distillate inventory pattern this year has been the growing level of exports. In fact the EIA just reported that April distillate exports in April set an all time monthly record. The U.S. Energy Information Administration (EIA) monthly data indicate the increase in net exports of distillates has continued largely unabated in 2012, with net exports of distillate fuels in April registering 981,000 barrels per day (bbl/d), the highest volume since monthly U.S. trade data have been recorded. The distillate trade balance for April reflects both a near-record level of exports and a sluggish flow of imports. In the first four months of this year, gross distillate exports have averaged 947,000 bbl/d, a 215,000-bbl/d (29-percent) increase compared with the same period in 2011.

Gasoline inventories increased marginally versus an expectation for a slightly larger build in stocks as the summer gasoline driving season gets underway. Total gasoline stocks increased by about 0.2 million barrels on the week versus an expectation for a modest build. The deficit versus last year came in at 7.6 million barrels while the deficit versus the five year average for the same week was about 7.5 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 on the week as everything in the complex decreased on the week except for gasoline which built more than expected. Overall this week's report was biased to the bullish side.
I still think the oil price is overvalued especially after last Friday's huge increase. However, the combination of the growing geopolitical concern around Iran and the Middle East as well as the view that the global Central Banks are more likely to ease monetary policies further as well as initiating new round of stimulus is should contribute the market stabilizing (after some profit taking selling). For the moment the oil complex is trying to establish a new trading range and may likely push the upper limits of the range as long as the Norwegian oil strike continues, the rhetoric out of Iran continues and the macro economic data continues to support more easing.
I am moving my view to bullish as the hot weather has persisted across major portion of the US and is resulting in a modest increase in Nat Gas cooling related demand. The inventory surplus is still narrowing versus both last year and the five year average but there is still an exposure of inventories prematurely hitting maximum storage capacity. storage.

This week the EIA will release the weekly Nat Gas inventory report one day late due to the Us holiday...Friday, July 6th at 10:30 AM. This week I am projecting the fifteenth net injection into inventory of 37 BCF. My projection is based on a week that experienced a considerable amount of Nat Gas cooling related demand. My injection forecast is based on the fact that major portions of the US experienced above average temperatures. My projection compares to last year's net injection level of 90 BCF and the normal five year average net injection for the same week of 79 BCF. Bottom line the inventory surplus will narrow again this week versus last year and the five year average if the actual data is in sync with my projections and within the range of underperformance of injections we have seen over the last several months. In fact some of the projections are even lower than my 37 BCF projection.

Currently markets are mostly lower ahead of the US employment data report as shown in the following table.

Best regards,
Dominick A. Chirichella
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