The supply side of the equation continues to dominate the oil market sentiment. The issues in Libya and Egypt in particular have dominated the media air waves and thus the market sentiment of oil market participants. Libyan production has been mostly shut in for an extended period of time as strikes continue at the export terminals. As such there have been no exports from a country that desperately needs the revenue stream.

Alongside Libya is the turmoil that has been ongoing in Egypt since the overthrow of their President. Yesterday alone hundreds were killed or injured as the military cracked down on pro-Morsi supporters. In fact the death toll has surged to 525 according to this morning's media reports. The country is a mess with no signs that the situation is getting any better anytime soon. Also let's not forget the ongoing civil war in Syria as well as the rise of violence in Iraq of late.

Needless to say the Middle East and North Africa are at a very high level of instability and as long as it lasts the risk premium will continue to grow in the price of oil with not much of a chance for a sizeable downside correction in oil prices anytime soon. Fear of further crude oil supply disruptions has been the main price catalyst over the last several weeks and has offset the prospects for a weakening demand picture. The robust production gains in the US have not been enough to offset the current and potential supply interruptions occurring at the present time.

Much like the rest of the oil complex the risk premium is hitting the Brent market more directly than the WTI market with the Brent/WTI spread in a mild widening pattern over the last three weeks or basically since the spread hit parity back on July 19th. In spite of the fact that the surplus crude oil situation in Cushing and the broader PADD 2 region of the US has been quickly dissipating the market has been more focused on the loss of supply from places like Libya as well as the interruption in North Sea supplies due to maintenance. Not only have many Forties cargoes been postponed from August to September now two September cargoes have been pushed forward with one of them now scheduled to load in October.

Although the longer term trend for the Brent/WTI spread remains in a narrowing pattern the shorter term trend has clearly switched from a simple short covering rally to a widening trend as the supply side of equation dominates the market sentiment and thus the spread. The new spot October Brent/WTI spread has been in a milder widening pattern than the expiring September spread. The Oct spread is in an upward trending channel currently bounded by support around the $1.85/bbl level and resistance around the $3.25/bbl level. Until the North Sea returns to normal production levels as well as a return to some level of stability in MENA the spread is likely to remain in its current short term widening pattern.

On the tropical front there are now two weather patterns that have materialized. The closest one is an area of low pressure that is forming between the northeastern tip of Honduras and the Cayman Islands. Upper level winds are favorable for additional development of this disturbance over the next couple of days as it moves northwestward at 10 mph and should reach the Yucatan Peninsula later today. At the moment it is a high probability event having a 70 percent chance of becoming a tropical cyclone over the next forty eight hours and a high chance or 80 percent of becoming a tropical cyclone over the next five days as the environmental conditions are expected to be favorable for additional organization. Most of the models show this storm will likely to head into Mexico and not threaten US oil and NG operations in the northern Gulf. This weather pattern remains on our radar.

Tropical Depression Five is now in play located a few hundred miles southeast of the Cape Verde Islands. TD 5 is projected to strengthen to a storm in the next day or so as it moves westward toward the Caribbean. This storm is still far away from land and thus still an unknown as to if and when it will become an issue for oil and gas operations in the Caribbean or US. At the moment neither system is an imminent risk to oil and Nat Gas producing operations in the US Gulf of Mexico. That said the season is starting to pick up and must now be watched carefully as both of these systems develop over the next few days.

Global equity markets are back on the defensive over the last twenty four hours with eight of the ten bourses in the Index losing ground since the previous day's close. The Index is now showing a year to date loss of 1.5 percent… still well off of the worst levels hit in mid-July of this year. Global equities have been a negative price driver for the oil complex over the last twenty four hours. However, once again the US dollar has offset the equity markets as a price catalyst as the US dollar Index has been lower for the last two trading session and has provided a modicum of upside price support for the commodities markets. Overall the externals remain a neutral for oil and the broader commodity complex.

Wednesday's EIA inventory report was mixed with a bias to the bullish side as total commercial stocks decreased modestly for the first week in three. Overall I would categorize the report as mildly bullish. Total commercial stocks of crude oil and refined products decreased by 1.9 million barrels as crude oil inventories decreased for the second week in a row. Refinery utilization rates decreased by 1.5 percent to 89.4 percent 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 1.9 million barrels. The year over year surplus came in at 20.4 million barrels while the surplus versus the five year average for the same week widened to 49 million barrels.

Crude oil inventories decreased more than the expectations by 2.8 million barrels. With the decrease in crude oil stocks this week the crude oil inventory status versus last year is showing a deficit of around 5.7 million barrels while the surplus versus the five year average for the same week came in around 17.6 million barrels. Crude oil imports increased modestly on the week.

PADD 2 crude oil inventories decreased modestly by about 0.3 million barrels while Cushing, Ok crude oil inventories decreased strongly by 1.4 million barrels on the week. PADD 2 crude oil stocks are now showing a deficit of 2.9 million barrels versus last year and 13.5 million barrels surplus versus the five year average. The Cushing area deficit came in at 6.7 million barrels versus last year with a 5 million barrel surplus compared to the five year average. Cushing stocks are now at a level not seen since the first quarter of 2012. Since the end of June Cushing crude oil stocks declined by about 11.2 million barrels. The strong decrease in crude oil inventories in Cushing was bearish for the Brent/WTI spread but as discussed in detail above the spread is currently being driven by the various supply interruptions occurring around the world.

Distillate stocks increased by 2 million barrels versus market expectations for a smaller build even as refinery run rates decreased by 1.5 percent. Heating oil/diesel stocks increased on a week over week basis. The year over year surplus came in at 4.3 million barrels while the five year average deficit came in around 20.6 million barrels.

Gasoline inventories decreased modestly versus an expectation for a modest draw. Total gasoline stocks decreased by about 1.2 million barrels on the week. The surplus versus last year came in around 18.7 million barrels while the surplus versus the five year average for the same week came in at about 12.5 million barrels.

Gasoline stocks decreased in PADD 1 (US East Coast) by 0.4 million barrels this week with the surplus versus last year coming in around 11.4 million barrels with a 5.3 million barrel surplus compared to the five year average for the same week. With a major portion of the summer driving season now in the history books gasoline remains well supplied even with several unplanned refinery outages over the last few months.

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 mildly bullish.

I am maintaining my oil view at neutral and my bias at neutral for the short term as the downside correction seems to be losing momentum once again. The strong destocking pattern of crude oil in the US Midwest may start acting as a supporting catalyst once again.

I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture has shifted as the temperatures across the US do not appear to be moving back to warmer than normal weather anytime soon.

This week the EIA will release its inventory on Thursday, August 15th at 10:30 am. This week I am projecting an over performance of the injection level into inventory of 65 BCF. My projection for this week is shown in the following table and is based on a week that experienced mostly below normal temperatures over a major portion of the US during the report period. My projection compares to last year's net injection of 21 BCF and the normal five year net injection for the same week of 42 BCF.

Bottom line the inventory deficit will narrow this week versus last year while the surplus compared to the so called more normal five year average will widen if the actual numbers are in sync with my projections. This week's net injection will be bearish when compared to the historical data.

If the actual EIA data is in line with my projections the year over year deficit will come in at about 253 BCF. The surplus versus the five year average for the same week will widen to around 43 BCF. The early market is looking for an injection into inventory this week in the range of 60 BCF to about 80 BCF with the Reuters market consensus coming in at 70 BCF.

Markets are mostly higher heading into the US trading session as shown in the following table.

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

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