Yesterday was all about the announcement of the details of the new bond buying program by ECB President Draghi. So far the market has viewed the new program as mostly bullish for risk asset markets especially the global equity markets. The reaction on the commodity side was much more muted than on the equity front. In fact oil prices surged higher only to closes in negative territory and at its lows. It was a technical reversal day to the downside for oil and one that is biased to the bearish side. The spot Nymex WTI contract is currently down by about $0.30/bbl for the week as of this writing.

The new program in the EU will target government notes with maturities of 1 to 3 years. Purchases will be fully sterilized to ensure a neutral impact on money supply, there will be no cap and the ECB will not have seniority. All in all a program that should provide a secure backstop to those member countries that has been fighting the sovereign debt issue for over three years. It should keep bond rates at reasonable levels for those countries that apply to the ECB for this program. The program comes with strict conditions in the area of austerity.

With the markets still in the process of digesting the new program out of Europe all eyes now turn to the US jobs picture this morning and how the new data point might impact next week's US Central Bank FOMC meeting. The lead up to this morning's nonfarm payroll report has been somewhat positive as both the ADP private sector jobs report on Wednesday and the jobless claims report yesterday both came in better than expectations. This is leading the market to believe that today's Labor Department report could also come in better than the expectations. At the moment the consensus estimate is for a net jobs gain of around 130,000 with the unemployment rate holding steady at 8.3%. The data will be analyzed more from the perspective of what it may mean to the US Fed at their next meeting insofar as deciding on a new round of quantitative easing.

Today's report could turn out to be a positive for the equity markets and possibly even the oil and commodity complex irrespective of what the number is. If it comes in below expectation or even at the consensus level the market will likely view that as a sign that the Fed will probably lean toward a new QE program possibly as early as next week's FOMC meeting. If so I would then expect to see gold, oil equities and most other risk assets to continue yesterday's rally. On the other hand if the number comes in much better than expected the market will view that event as the US economy possibly starting to come out of its malaise and could also result in a rally in risk assets.

That all said today with be a volatile trading session with the potential for intraday reversals like we saw yesterday in the oil complex. There are many other overhanging issues that are creating uncertainty over the risk asset markets like the US election, the fiscal cliff, the slowing of China and many others.

Global equities were the major recipient of the Draghi announcement yesterday as shown in the EMI Global Equity Index table below. The Index has reversed from being lower on the week to now showing a 1.2% gain for the week with a full day of trading still left in the US. The year to date gain has widened to 5,2% with only China still in negative territory. But as shown in the table China had a huge 3.7% rally on the European news. Europe is China's number one export market. Germany is now solidly over the 20% gain level for the year and holding the top spot in the index... as it has for all of 2012. Paris has joined Germany and is also showing double digit gains for the year with the US Dow holding the third spot in the Index. Global equities have now switched to being a positive price driver for oil and the broader commodity complex.
On the storm front there are no new tropical storms in the Atlantic that could impact the oil and Nat Gas region in the US Gulf at the moment. However, part of Isaac regenerated itself in the Gulf and if it continues to develop it could slow the recovery process already in place in the Gulf. Right now the NHC only places a 30% chance of this weather pattern continuing to develop... but it is something to keep on the radar. The energy industry remains in restart mode with about 593,000 bpd or 42.9% of GOM crude oil production still shut in and 957 mmcf/d or 21.2% of GOM Nat Gas production still shut as of yesterday afternoon. This is an ongoing process and I am still expecting producing operations to return to normal within the next week. Refineries are restarting and logistics are also close to normal with LOOP back to normal operations as of September 1. The big impact from the storm will begin to show up in this week's inventory reports and to a lesser extent in next week's reports.

Wednesday's EIA inventory report was bullish for crude oil and gasoline and neutral to bearish for distillate. Total commercial stocks decreased strongly as did crude oil inventories all related to the preemptive shut-ins from Hurricane Isaac. Refinery utilization rates declined strongly on the week down to 86.1 of capacity. 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 9.6 million barrels after increasing the week before. The year over year surplus narrowed to 3.8 million barrels while the surplus versus the five year average for the same week narrowed to 23.8 million barrels. By all measurements total oil supply in the US is still well balanced to comfortable irrespective of the evolving geopolitical risk in the Middle East.

Crude oil inventories decreased (by 7.4 million barrels) and within the expectation range. 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 4 million barrels while the surplus versus the five year average for the same week came in around 20.3 million barrels. Crude oil imports increased strongly on the week.

PADD 2 crude oil inventories decreased marginally by about 0.3 million barrels while Cushing, Ok crude oil inventories were about unchanged on the week. Crude oil inventories in the mid-west region of the US are off of their record high levels as the Seaway pipeline is now pumping oil out of the region as well as refineries running at over 90% of capacity. The decline in crude oil inventory in the region is marginally bearish for the Brent/WTI spread. The spread traded has widened over the last twenty four hours as the market seems to be pricing in a SPR release. The Oct spread is once again approaching the $18/bbl level.

Distillate stocks surprisingly increased even after a 5.1% decline in refinery run rates. Heating oil/diesel stocks increased by 1 million barrels. The year over year deficit came in around 29.7million barrels while the five year average remained in a deficit of about 25.1 million barrels. The lost distillate production was offset by a likely reduction in exports.

Gasoline inventories decreased more than the expectations again all related to Isaac. Total gasoline stocks decreased by about 2.3 million barrels on the week versus an expectation for a smaller draw. The deficit versus last year came in at 9.9 million barrels while the deficit versus the five year average for the same week was about 6.4 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 inventories for gasoline and crude oil were bullish while distillate and Jet Fuel were neutral to bearish. Overall this week's report was marginally biased to the bullish side.
I still think the oil price is overvalued and toppy at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. That said prices are being impacted by a combination of yesterday's the weekly inventory report as well as by the outcome of the ECB meeting and the growing view that more stimulus from both China and the US is on the way.
I am keeping my view at neutral as the industry is already almost back to normal operations after Isaac. Once the industry has fully recovered (in about a week or so) the industry will be entering the shoulder season... where the only atypical pull on Nat Gas will be demand from coal to Nat Gas switching. At current prices the economics still favor Nat Gas but if prices do work their way to the upper end of the trading range utilities could begin to move back to coal.

Markets are mostly higher as shown in the following table.
Best regards,
Dominick A. Chirichella
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