WTI was the only commodity in the oil complex that was able to hold onto to a small gain on Wednesday. However, overnight WTI has given back yesterday's small gain. Once again the main feature in the oil market was another large narrowing move of the Brent/WTI spread. The push lower came after the EIA showed a surprisingly large 1.5 million draw in Cushing inventories even as refinery utilization rates in PADD 2 declined by 2.7 percent as the spring refinery maintenance season gets underway. In fact over the last two weeks refinery run rates in PADD 2 have declined by 8.3 percent or a decline in crude oil inputs by about 325,000 bpd. Oil is moving out of the region in spite of the declining demand for crude oil.

In addition to the normal pipeline flow out of the area most incremental transport methods are still being maximized. With the WTI/LLS spread still above $19/bbl basis Cushing and Midland the economics of moving oil out of Cushing still supports rail and barge movements.

Although the Brent/WTI spread has narrowed strongly over the last week or so the upside risk from the ongoing refinery maintenance season still exists. Last year Cushing stocks didn't destock until mid-May, when the spring refinery maintenance season had about wrapped up. Last year, Cushing stocks built by almost 10 mn barrels from mid-March to mid-May last year. Even though Cushing is showing the early signs of topping and starting to destock, as the refining sector enters the heart of the maintenance season, we could once again see the current pattern reversed with Cushing stocks starting to build. If this reversal occurs it will be at a time with Cushing stocks are still at near record high levels. For now I continue to remain bearish the spread unless there is an indication that inventories are returning to a building pattern in Cushing. The May Brent/WTI spread is now the new spot month spread

Global equity markets are continuing to struggle to hold onto to last week's gains as shown in the EMI Global Equity Index table below. The Index declined by about 0.5 percent over the last twenty four hours with the year to date gain narrowing to 1.1 percent. On the week the Index has lost about 1.2 percent. Brazil remains at the bottom of the list of bourses with Hong Kong joining Brazil in the loss column for the year. As has been the case for most of this year Japan's bourse continues to surge higher and is inching toward a 20 percent gain for 2013. London and the US are the only other bourses showing double digit gains for the year. Global equity markets have been neutral to biased to the bearish side for the oil markets this week as well as for the broader commodity complex.
Yesterday's EIA inventory report was mixed with total commercial stocks increasing on the week. Overall I would categorize the report as slightly biased to the bearish side with the exception of gasoline. Total commercial stocks increased by 1.4 million barrels with crude oil inventories building on the week. Refinery utilization rates decreased strongly by 1.2 percent on the week to 81 percent of capacity which indicates that capacity is continuing to shut for scheduled spring maintenance. 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 increased by 1.4 million barrels. The year over year surplus came in at 34.2 million barrels while the surplus versus the five year average for the same week held at 54.9 million barrels.

Crude oil inventories increased (by 2.6 million barrels) and more than the market expectations. 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. With the increase in stocks this week the crude oil inventory status versus last year is showing a surplus of around 33.3 million barrels while the surplus versus the five year average for the same week came in around 49.6 million barrels. Crude oil imports increased modestly on the week.

PADD 2 crude oil inventories increased modestly by about 0.6 million barrels while Cushing, Ok crude oil inventories declined strongly by 1.5 million barrels on the week. PADD 2 crude oil stocks are still showing a huge surplus of 16.6 million barrels versus last year and 29.8 million barrels versus the five year average. The Cushing area surplus narrowed to 10.6 million barrels versus last year and 17.3 million barrels compared to the five year average.

There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to historically normal level of WTI trading at a premium over Brent. The decline in crude oil inventories in Cushing was bearish for the Brent/WTI spread.
Distillate stocks were about unchanged versus an expectation for a modest draw as refinery run rates decreased by 1.2%.

Heating oil/diesel stocks held steady on a week over week basis even as the east coast experienced winter like temperatures. The year over year deficit narrowed to 14.4 million barrels while the five year average deficit came in around 18.5 million barrels.
Gasoline inventories decreased versus an expectation for a smaller draw. Total gasoline stocks decreased by about 3.6 million barrels on the week. The deficit versus last year widened this week to 3.8 million barrels while the deficit versus the five year average for the same week came in at about 1.4 million barrels. Gasoline stocks decreased in PADD 1 reversing the four week building trend. PADD 1 stocks (US East Coast) decreased by 0.6 million barrels this week with the deficit versus last year widening to just 1.2 million barrels and about 0.9 million barrels compared to the five year average.

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 for the complex. Overall this week's report was mostly bearish.
Yesterday the IEA released their monthly oil market report. For the second month in a row they lowered their forecast for oil demand growth in 2012 even as both the EIA and OPEC did not change their forecasts. Following are the main highlights of the IEA report.

Oil futures prices reversed their upward course in mid-February. By early-March, prices for benchmark Brent crude had fallen to nine-week lows and were last trading around $110/bbl, while WTI was pegged at $93/bbl.

Sluggish economic signals spanning several key economies underpin our projection of 0.9% or 820 kb/d annual growth in global oil demand for 2013, to 90.6 mb/d. This contrasts with a 1.4 mb/d growth average for non-recessionary years.

Global oil supply inched up in February by 90 kb/d, to 90.8 mb/d, led by a 150 kb/d hike in OPEC crude, to 30.49 mb/d. Increased Iraqi supply was the main factor behind the OPEC gain. Heavy spring refinery maintenance cut the 'call on OPEC crude and stock change' for 2013 by 100 kb/d from last month's estimate, to 29.7 mb/d.

Non-OPEC output slipped by 60 kb/d in February to 54.1 mb/d but remained 0.6 mb/d higher than last year, as North American output growth offset lower European and Latin American supply. Non-OPEC supply is forecast to grow by 1.1 mb/d in 2013, to 54.5 mb/d.

OECD commercial oil holdings rebounded by 22.5 mb to 2 689 mb at end-January. Total product stocks covered 30.7 days of forward demand, 0.1 day higher than last month. Preliminary data show OECD stocks fell by 12.9 mb in February, as a 20.2 mb draw in refined products outweighed a build in crude.

The estimate of global refinery crude runs has been cut to 74.8 mb/d on heavy US refinery maintenance and sluggish refining activity in Europe. As seasonal maintenance winds down in the US and Europe, Asia is just getting started, with a very heavy turnaround schedule from March onwards.

I am maintaining my view of the entire complex at neutral as the oil complex appears to still be in the process of forming a short term technical bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.
I am maintaining my view to cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.

Nat Gas futures continue to trade above the $3.50/mmbtu breakout area (now support) suggesting that the market may be in the early stages of a new leg to the upside. The futures market was quiet on Tuesday as the industry awaits Thursday's EIA inventory report. If the market is able to get through the $3.66/mmbtu resistance level the next upside testing area would be around the $3.75/mmbtu level. From a technical perspective the Nat Gas futures market remains in an uptrend that has now been in play since bottoming in mid-February.

This week the EIA will release its inventory on its normal schedule and time... Thursday March 14th at 10:30 AM. This week I am projecting an average withdrawal of 120 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced an above normal level of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 66 BCF and the normal five year net withdrawal for the same week of 74 BCF. Bottom line the inventory deficit will widen modestly this week versus last year while the surplus will narrow compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be bullish when compared to the historical data and as of today the market seems to starting to price that outcome into the futures market.

If the actual EIA data is in line with my projections the year over year deficit will widen to about 482 BCF. The surplus versus the five year average for the same week will come in around 149 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a range of 90 BCF to about a 150 BCF net withdrawal with the Reuters market consensus at 134 BCF.

Markets are mixed heading in the US trading session as shown in the following table.

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


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