The oil complex inched higher pushing all of the commodities in the complex to near the upper end of their respective trading ranges. At the moment the technical driven rally in oil prices is offsetting the fundamental view that supply is robust and demand is faltering in sync with the slowing global economy. The upside momentum picked up as Monday's trading session progressed after starting the week in negative territory. The market has not only been driven by a technical short covering rally but the oil complex has been relatively in sync with the equity markets… especially the western bourses. Yesterday the US and European equity markets moved higher with the US S&P notching a new all-time high providing short term support for oil and other commodity prices along the journey.

The June Brent/WTI spread continued to narrow even as the flat price of oil pushed to higher levels. The combination of a robust supply situation in the North Sea along with Cushing crude oil inventories once again looking like they are entering a destocking pattern has pushed the spread solidly below double digit levels. The spread moved into a narrowing pattern in late February then moved into a sideway pattern from about mid-April for a week or so as the market digested the shutdown of the Pegasus pipeline and since last week it has moved back into a narrowing trend on its move below the $10/bbl level.

As of this writing the spread is trading around the $9.40/bbl level or the lowest value since late December, 2012 (basis the spot continuation chart). From a technical perspective the next stopping or support point is around the $8.25/bbl level hit in mid-December of 2012. At the moment the technical pattern is suggesting that likelihood of a test of the new support level is increasing.

From a fundamental perspective all signs continue to suggest that North Sea production will remain at normal to above normal levels in the short to medium term while it now appears that Cushing stocks may once again be moving back into a destocking pattern. I am expecting a modest decline in crude oil stocks out of Cushing this week even with the Pegasus pipeline still shut down.

The one near term situation that could slow the narrowing trend a bit is the latest force majeure declared by Shell on its Bonny Light exports after closing the Nembe Creek Trunk line around April 15th to remove oil theft connections. So far about five May cargoes have been deferred to June. That said the demand for Nigerian crude into the US and Europe has been declining strongly over the last several months with US crude oil production at over twenty year highs along with European crude oil demand remaining weak as the region continues to experience another recession. In fact more and more West African crude is now heading toward the Asian markets. Thus the impact of what appears to be a limited force majeure for a limited timeframe may not have as much of an impact on the Brent side of the equation as it once did in the past.

Global equity markets gained ground over the last twenty four hours as the EMI Index is once again back into positive territory for the year to date as shown in the table below. The EMI Index is now higher by almost 1 percent for the week resulting in the Index showing a 0.4 percent gain for 2013. Seven of the ten bourses in the Index are now in positive territory for 2013 with Brazil still showing the largest loss for the year. On the other side of the equation Japan has been relentless and is now showing a 33.3 percent gain for 2013 as the weak Yen remains the main driver for this export oriented economy. Equities are a short term bullish price driver for the oil complex.

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 a modest build in crude oil inventories, a small build in distillate fuel... as some areas of the US returned to spring like temperatures during the report period... and a draw in gasoline stocks even as refinery runs are expected to show a small gain.

I am expecting crude oil stocks to increase by about 1.0 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 13.7 million barrels while the overhang versus the five year average for the same week will come in around 31.3 million barrels.

I am expecting a modest draw in crude oil stocks in Cushing, Ok even though the Pegasus pipeline has remained shut down for all of the report period. This will be bearish for the Brent/WTI spread and should serve as a catalyst to continue the current narrowing trend of the spread in the short term.

Even with refinery runs expected to increase by 0.3 percent I am expecting a small draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year surplus of around 7.6 million barrels while the surplus versus the five year average for the same week will come in around 4.8 million barrels.

Distillate fuel is projected to increase by 0.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 8.2 million barrels below last year while the deficit versus the five year average will come in around 18.7 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 not in directional sync with some large 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 of the entire complex at neutral with a cautiously bullish bias as the short term price recovery in oil over the last week or so could extend further. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range resistance levels suggesting further upside potential in the short term.

I am maintaining my view at neutral for Nat Gas and maintaining my bias at neutral even though the spot Nymex contract is continuing to trade above the $4.16/mmbtu level. The market failed for the fourth time on Monday to breach the $4.40/mmbtu resistance and then turned to the downside since failing. I remain neutral until the next resistance level is breaches and the market settles above the $.40/mmbtu level. 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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