This has been mostly a fundamentally driven week for oil prices with the three monthly oil forecasts hitting the media airwaves over the last twenty four hours along with the API data late yesterday afternoon, the EIA inventory report this morning and an OPEC meeting going on at the moment. OPEC is meeting in Vienna to elect a new Secretary General and to discuss their production strategy for next year. The market is expecting OPEC to roll over their existing 30 million barrel per day ceiling for now and address a production cut during the first half of 2013 if needed. With the global economy showing signs of stabilizing OPEC may be more comfortable in taking a wait and see approach to changing production levels until the US fiscal cliff is in the background and more macroeconomic data is released in the first quarter.

Today the US Federal Reserve FOMC meeting will conclude around noon with most market participants expecting the Fed to keep short term interest rates at near zero levels and mostly likely extend the QE3 mortgage buying program. If QE3 is extended it could give a level of support for oil prices as participants view quantitative easing as an inflationary policy and one that could easily result in pushing oil and most all commodity prices higher if in fact inflation starts to increase.

On the US fiscal cliff negotiations there has been some movement over the last day or so as both sides talked yesterday with other discussions going on behind the scenes. Obama reduced his tax increase demand slightly. Both sides still remain pretty far apart but they are moving closer which is a positive sign that a deal will likely be done. I have been indicating that a deal will get done possibly as early as before the Christmas holiday. Both sides seem to have now come to the realization that they are at the end point as to how much each side can achieve toward their view. As such they are starting to slowly move to the middle.

Global equity markets have continued to price in a resolution to the US fiscal cliff situation as shown in the EMI Global Equity Index table below. The Index is now higher by 1.5% for the week resulting in the year to date gain widening to 9.6% or the highest level since early April of this year. Germany remains at the top of the leader board showing a 29% gain for 2013 with four other bourses also showing double digit gains for the year. Global equity market have been a positive price driver for oil prices as well as the broader commodity complex for the last week or so.

This morning the International Energy Agency released their monthly oil market report. Both OPEC and the EIA issued their reports yesterday with no change in oil demand projections for this year or for 2013 but with a bump up in supply from the US in the EIA report. Following are the highlights from the IEA report which is pretty much in sync with the EIA and OPEC reports except the IEA increased their projection for oil demand for 2013 as China demand is growing.

Oil futures extended earlier declines in November, as persistent concerns about the economy and the looming US fiscal cliff appeared to eclipse those about political risks in Israel, Gaza, Syria and Iran. Benchmark crudes inched further down in early December, with WTI last trading at $85.90/bbl and Brent at $107.85/bbl.

Global oil demand is projected at around 90.5 mb/d in 4Q12, 435 kb/d more than forecast last month, following stronger-than-expected October preliminary demand data and signs of improving Chinese sentiment. Relatively sluggish demand growth is forecast through 2013, as global economic expansion remains tepid.

Non-OPEC production bounced back by 0.7 mb/d in November on the month, to 54 mb/d, after fields in the North Sea and Brazil returned from maintenance. US output also rose steeply and will contribute to an aggregate non-OPEC increase of 0.9 mb/d to 54.2 mb/d in 2013, the highest growth rate since 2010.

OPEC crude oil supply inched up by 75 kb/d to 31.22 mb/d in November, led by higher output from Saudi Arabia, Angola, Algeria and Libya. Nigerian output remained constrained by severe flooding and sabotage. Iranian production edged lower under the weight of shipping constraints and stepped-up sanctions.

OECD commercial oil inventories drew by a seasonal 16.2 mb to stand at 2 722 mb in October, bringing to a halt seven consecutive months of stock building. Forward cover remains at 59.1 days, unchanged from a downwardly-revised September level. Preliminary data indicate a further draw in November.

Global refinery runs have been revised lower by 140 kb/d for 4Q12 to average 75.3 mb/d. Growth is nevertheless expected at 950 kb/d year-on-year, driven by non-OECD Asia. Refinery margins extended earlier declines in November, led by decreases in gasoline and fuel oil cracks.

The API report was simply bearish and not in directional sync with the range of expectations. Crude oil showed a surprise build compared to expectations for a modest draw. Gasoline showed a larger than expected build in inventory while distillate fuel also built versus an expectation for a smaller build. The API reported a build (of about 4.3 million barrels) in crude oil stocks versus an industry expectation for a modest draw as crude oil imports increased while refinery run rates increased by 0.9%. The API reported a modest build in distillate and in gasoline stocks.

The API report is bearish with many participants now looking at this morning's EIA inventory report with much more interest. The oil market is stable heading into the US trading session and ahead of the EIA oil inventory report at 10:30 AM today. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning.

The API reported a build of about 4.3 million barrels of crude oil with PADD 2 stocks increasing by 1.1 million barrels. On the week gasoline stocks increased by about 2.3 million barrels while distillate fuel stocks increased by about 2.2 million barrels.
With geopolitics less of an issue or price driver than it was the last few weeks the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.

My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to increase marginally as the refining sector continues to return to normal from maintenance. I am expecting a modest draw in crude oil inventories, a build in gasoline and in distillate fuel stocks as the weather was mostly warmer than normal over the east coast during the report period. I am expecting crude oil stocks to decrease by about 2.3 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 33.4 million barrels while the overhang versus the five year average for the same week will come in around 38.7 million barrels.

I am expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is still pumping and refinery maintenance programs in the region are mostly over. This will be bearish for the Brent/WTI spread in the short term as the spread is currently trading at a relatively high premium to Brent and very near the highs recently hit. The slow return from maintenance in the North Sea as well as the evolving situation in the Middle East have been the main drivers that have resulted in the Jan Brent/WTI spread still trading around the $22/bbl level as of this writing. The narrowing of the spread should begin to ease once the North Sea returns to a more normal production level and the situation in the Middle East quiets down.

With refinery runs expected to increase by 0.2% I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.8 million barrels which would result in the gasoline year over year deficit coming in around 1.1 million barrels while the surplus versus the five year average for the same week will come in around 4.2 million barrels.

Distillate fuel is projected to increase by 1.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 24.8 million barrels below last year while the deficit versus the five year average will come in around 30 million barrels.

I am maintaining my view and bias at cautiously bearish as the fundamentals are now biased to the bearish side as well as the technicals. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. However, the fundamentals, the markets view of the global economy, the US fiscal cliff negotiations and less so the geopolitics will be the price drivers in the short term pretty much in that order. This is still an event driven market for oil at the moment.

I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... even after last week's bullish inventory snapshot. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the early stages of the winter heating season and currently those forecasts are all still mostly bearish.

Markets are mostly higher 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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