Today is starting off as a risk on day after a successful Spanish debt auction along with a jump in German investor confidence and better than expected US retail sales data yesterday. In addition India joined the easy money crowd by announcing a surprise 0.5% cut in their short term interest rates to stimulate their slowing economy. The only negative overnight was a decline in foreign direct investment in China. Although there was a plethora of positives or bullish economic data I put the most stock on China as it is the main oil demand growth engine in the world. The data out of China continued to indicate a slowing of this economy.

China's foreign direct investment dropped for the fifth month in a row supporting the view that the economy is still slowing and not yet bottoming. A slowing Chinese economy is a more bearish catalyst for oil and will likely play a much larger role in how oil demand growth evolves over the next 6 months than a few modestly bullish data points out of the developed world.

At the moment oil is being driven by a variety of positive economic data points as discussed above coupled with the unwinding of the Brent/WTI spread as well as the crack spreads. WTI has been gaining ground all week while Brent has been in decline. The Iranian risk premium is continuing to recede from the price of Brent at a much faster pace than out of WTI. In addition the Brent/WTI spread is also in the process of going through a readjustment as the Seaway pipeline originally scheduled to begin flowing oil in June is now scheduled to start early in Mid-May.

This week has been very much a week of prices driven by a major alignment in the spreads coupled with positive data out of the US and Europe which is offsetting the negatives out of China and the Middle East (at least in today's trading). Overall, oil prices in general should be in a slow decline which they were as of yesterday and should likely continue with the biggest decline expected in the Brent markets for all of the previously mentioned reasons.

So far WTI is still trading solidly in the $102 to $107/bbl price range while the majority of the decline in the Iranian risk premium is mostly hitting the Brent Market ...and thus pretty much everything in the oil complex other than WTI and some of the crudes that are still tightly linked to WTI. I am still expecting a further overall decline in the oil complex and at some point in time it will also catch up with WTI (after all of the spread realignment is over). Do not lose sight of the fact that WTI is primarily higher due the spread realignment. The overall oil complex (excluding WTI) has been drifting lower all week.

Global equities were mixed over the last twenty four hours with the week to date data level about unchanged so far as shown in the EMI Global Equity Index table below. The Index is about unchanged on the week (so far) with the year to date gain still hovering around the 8.2% level. The Index is currently being supported by a jump in European equities after the better than expected Spanish debt auction and German consumer confidence data. So far the bullish sentiment out of Europe is spreading to US equity futures which are currently projecting a positive opening on Wall Street this morning. Global equities have been a neutral to slightly bullish catalyst for oil prices as well as the broader commodity complex so far this week.
This week's oil inventory reports will be released on their normal schedule. The API data will be released on Tuesday afternoon while the EIA data will hit the media airwaves at 10:30 AM EST on Wednesday. At the moment oil prices are still being mostly driven by the direction of the euro and the US dollar as well as by a view that China's economy is starting to slow. The tensions evolving in the Middle East between Iran and the West have eased a bit as another meeting is scheduled for May. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data suggesting that this week's oil inventory reports may not have a major impact on price direction. This week's oil inventory report could 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.

My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed inventory report this week with a modest build in crude oil, a small decline in distillate fuel inventories and a modest decline in gasoline stocks along with a small increase in refinery utilization rates. I am expecting a draw in gasoline inventories and distillate fuel stocks as the summer planting season is very strong (increasing the demand for diesel fuel) while the export market remains robust. I am expecting crude oil stocks to increase by about 1.2 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 7.1 million barrels while the overhang versus the five year average for the same week will widen to around 22.9 million barrels.
Even with refinery runs expected to increase by 0.2% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 1.0 million barrels which would result in the gasoline year over year surplus coming in around 6.9 million barrels while the deficit versus the five year average for the same week will come in around 18.1 million barrels.

Distillate fuel is projected to decrease by 0.3 million barrels on a combination of steady exports and strong demand coming from the summer crop plantings. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.2 million barrels below last year while the deficit versus the five year average will come in around 0.5 million barrels.

I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $107/bbl. At the moment the oil complex is going through a spread realignment driven by a reduction in the tensions in the Middle East and thus a receding of the Iranian risk premium along with a sentiment swing in the Brent/WTI spread due to the early start of the Seaway pipeline. I am more comfortable staying on the sidelines today for the flat price market.
I am still keeping my view at and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season. As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.

What is seeming to be a repetitive pattern Nat Gas futures are once again in the midst of a very modest short covering rally ahead of some pretty hot weather and possibly another bearish inventory report. Over the last several weeks Nat Gas has tended to gain a bit of ground early in the week only to give it all back and then some during the second half of the week. It looks like we are setting up for another repeat performance. The upcoming weather forecast is not likely to result in any heating related Nat Gas demand and at the moment there are no signs of any producers biting the bullet and cutting production. It seems like no one is willing to take the first hit voluntarily as I suspect all are hoping for a very hot summer to push demand to a level that will slow the rate of injections into inventory. So far none of the longer range forecasts I have seen are calling for anything other than a normal summer season temperature wise and thus nothing but a normal amount of cooling related Nat Gas demand can be expected. In addition the early forecasts for the hurricane season are calling for a below normal year.

All signs continue to point to Nat Gas remaining in the long term downtrend it has been in until there are significant production cuts announced. I think some producers will step up prior to the point of no return (point when producers are ordered to curtail production by pipeline and storage facility operators). I suspect we will see movement in the Producing region first as inventories in this region are almost at 78% of maximum storage capacity. The other two regions have a bit more time before a forced cut will have to be made. I remain bearish for the short term but I am starting to look at ways to benefit from a turnaround which is likely to occur within the next 3 to 4 months (either voluntarily or forced by limitations in the infrastructure).

Currently markets are mixed as shown in the table below.

Best regards,
Dominick A. Chirichella
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