The direction of the oil complex continues to be mostly driven by the evolving storm in the Gulf of Mexico. Isaac is now on the verge of being upgraded to hurricane status as it is on a direct path to Louisiana. It could make landfall late today or early tomorrow. Isaac has caused a rash of preemptive energy shut-ins covering offshore crude oil and Nat Gas production, refinery shut-ins, LOOP closure as well as logistics precautions like pipelines. So far according to the Bureau of Safety and Environmental Enforcement (BSEE) about 1.1 million bpd of crude oil production or 78% of Gulf of Mexico (GOM) production is shut-in as of yesterday afternoon. Also 2,165 mmcf/d of Nat Gas production or 48% of GOM production is shut in. About a 1 million bpd of refinery capacity has been shut down while LOOP was also shut down yesterday. About 1 million bpd of imports of crude oil flow through LOOP.

At the moment the market is only pricing in a preemptive supply impact and no impact from possible infrastructure damage from the storm. In addition the market also pricing in the possibility of a release of SPR oil if any real shortage of crude oil develops even as the IEA just today reiterated there is no current reason for an SPR release as oil is well supplied globally. The amount of crude oil production shut in is about equal to the amount of refinery capacity that has also be shut down. So on a macro balance these two parts of the system offset each other and if any supply issues arise from the storm they are more likely to be related to refined products rather than crude oil. That said in addition to commercial inventories as a solution for lost supply of refined products the US has a bit of a cushion in that it has been exporting about 1 million bpd of distillate fuel and about 0.5 million bpd of gasoline. If product supply is needed exports would likely be diverted for internal consumption in the short term.

However, the supply risk does not end with just the storm in the Gulf as the Amuay refinery fire is still burning in a couple of the storage tanks and one of the world's largest refineries is still shut down. One of the fires have been extinguished and the others are close to being put out according to reports on Reuters. PDVSA is indicating that the refinery will be restarted by the end of the week. As I said yesterday this is an issue to keep on the radar as the restart plans could be pushed back for any number of reasons. Much like the Gulf disruption the refinery disruption in Venezuela is a refined products issue and certainly not a crude oil problem. Venezuela is a large exporter of refined products some of which ends up along the east coast of the US.

At the moment the market reaction to both Isaac and Amuay have been relatively muted with RBOB gasoline the only oil product that surged strongly over the last twenty four hours. Distillate fuel prices have not reacted anywhere near as strongly as gasoline even though the deficit gap between current distillate fuel inventories and last year is significantly wider than that for gasoline (see inventory tables below). In addition the summer driving season is all but over as the industry starts to focus on the upcoming winter heating season. For the next few days oil fundamentals will remain the primary price driver for the oil complex.

However as the storm eventually fades to the background market participants will once again begin to focus their attention back to the externals, the state of the global economy, a new solution out of the ECB and a possibility for a new round of quantitative easing out of the US. All eyes will be on US Fed Chairman Bernanke's speech at the Jackson Hole Symposium on Friday morning. The market will parse every word of his speech to see if he signals the Fed's next move. Back in 2010 he signaled QE2 was on the way at his Jackson Hole speech.

I would be surprised if his speech is anything different than what he has been saying as part of the normal FOMC meetings and Congressional testimony. I think the economic data is not completely clear cut nor is it clear cut (in my view) that another round of QE will in fact stimulate the economy and have a positive impact on the faltering job market. I think the Fed will wait for another month of data and possibly make a decision at the mid September FOMC meeting at the earliest. Also Mr. Draghi has changed his mind and he will not now be attending the Jackson Hole meeting. His office indicated a large workload will prevent his attending. So the markets will have to wait until September sometime at the earliest to see if the ECB will announce their supposedly new bold plan.

Global equity markets continued to drift lower over the last twenty four hours as shown in the EMI Global equity Index table below. The Index lost about 0.3% so far for the week narrowing the year to date gain to 4.7%. Only one bourse in the Index...China... is still in negative territory for 2012. Germany remains the leader of the pack as it remains the only bourse with solid double digit gains for the year. Global equity markets have been trading on the view that more stimulus, easing and/or a new ECB solution is on the way. Over the last week that view is easing a tad as market players are starting to recognize that things may not happen all that quickly. As such we have started to see a bit of profit taking selling in the equity sector that began last week. We could see equities drifting even lower from current levels if the Bernanke speech is a non event. If so it would also have a negative impact on oil prices as well as the broader commodity complex.
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This week's oil inventory reports will be released at its regularly scheduled date and time. The API inventory report will be released late Tuesday afternoon with the more widely followed EIA data hitting the media airwaves at 10:30 AM EST on Wednesday. I do not expect this inventory report to be impacted from the preemptive shut-ins related to Isaac as the report period ended on Friday when the cuts were just getting underway. Next's week inventory report will be impacted and reflective of the lost production of both crude oil and refined products. This week's oil inventory report could likely be a primary price catalyst especially if the actual outcome is significantly different from the market projections as the market is primarily focused on short term oil fundamentals due to the topical storm in the Gulf of Mexico.

My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to throttle back runs this week...most likely still a result of the unscheduled shutdowns (not related to Isaac) over the last couple of weeks or so. I am expecting a modest draw in crude oil inventories a draw in gasoline and a small seasonal build in distillate fuel stocks as the summer driving season is just about over. I am expecting crude oil stocks to decrease by about 1.8 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 1.9 million barrels while the overhang versus the five year average for the same week will come in around 18.6 million barrels.
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I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading around the $16.50/bbl premium to Brent level. I am still of the view that the spread will continue the process of normalization over the next 6 months.

With refinery runs expected to decrease by 0.3% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1 million barrels which would result in the gasoline year over year deficit coming in around 6.9 million barrels while the deficit versus the five year average for the same week will come in around 3.7 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 30.4 million barrels below last year while the deficit versus the five year average will come in around 25.7 million barrels. Exports of distillate fuel have been the main storyline this year with exports running around 1 million bpd.

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 mostly in the same direction as the projections. As such if the actual data is in line with the projections there will only be a modest change in the year over year comparisons for most of the complex...mostly on the crude oil side.
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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 $105 to $115 trading range. There are a lot of dynamics that will impact oil prices in the short term and the ranking of the price drivers are fluid and very susceptible to changing. The only constant for oil prices in the short term is above normal levels of volatility. Geopolitics are currently moving back into the foreground and starting to play a role in price setting once again as well as the perception of more stimulus. The first part of this week will be all about the impact of Isaac.
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I am keeping my view at neutral with a bias to the bullish side until more clarity emerges from Isaac. The warm weather is also returning and could support prices in the short term. If so the upcoming injections could continue to underperform history and thus result in the overhang of Nat Gas in inventory continuing to narrow as it has been for the vast majority of the injection season to date.

Markets are mostly higher as shown in the following table.

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Dominick
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.

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