The oil complex is starting the day with small gains ahead of this morning's EIA oil inventory report as the market digests the recently released IEA Monthly Oil report (see below for more details). The EIA and OPEC both increased their projection for global oil demand growth versus last month's reports with the IEA surprising the market by decreasing their forecast versus last month. It shows a bit of disagreement as to the extent of what many are suggesting is a turning of the corner to a faster growth pattern for the global economy. The IEA report is mildly bearish for oil while the EIA and OPEC reports were mildly bullish. Thus on average I would have to say a neutral round for the monthly projections. Next on the docket is the weekly oil inventory report this morning.

Equity markets have continued to recover some of last week's losses as shown in the EMI Global Equity Index table below. The Index is higher by about 0.2% for the week with the year to date gain standing at 0.9%. Not a strong rebound this week as trading activity in most global markets has been somewhat muted due to a lack of fresh economic data and limited activity in Asia due to the Lunar New Year holiday closures. Global equities have been a neutral price driver for the oil complex so far this week.

The IEA just released their latest Monthly Oil report. They diverged from the outcome of both the EIA and OPEC monthly reports which both raised global oil demand growth by lowering their projection for oil demand growth for 2013 by 90,000 bpd reflecting their view for slower global economic growth, despite improvements in the US and China. Following are the main highlights of the IEA report. This is a bit of a surprise and one that has not been as optimistic regarding economic growth and thus oil demand growth as in previous reports or what has been reported by the other agencies. The report is biased to the bearish side however there has been minimal reaction in the market as of this writing. In fact oil prices are mostly higher on the session so far.

Crude oil futures prices breached nine-month highs in early February as improved economic signals from China and the US, robust financial market activity and colder temperatures in the Northern Hemisphere buoyed market sentiment. Brent futures last traded at $118.75/bbl and WTI at $97.35/bbl.

Despite signs of improvement in China and the US, weak macroeconomic conditions are forecast to keep global oil demand growth capped at around 840 kb/d in 2013, to 90.7 mb/d. The growth projection is 90 kb/d less than estimated last month, as the IMF trimmed their GDP forecast to 3.5%, from 3.6% previously.

Global supplies fell by 300 kb/d in January, to 90.8 mb/d. Non-OPEC production slipped by 190 kb/d from the prior month, to 54.2 mb/d but is expected to increase by 750 kb/d in 1Q13 y-o-y. For 2013, non-OPEC supply is projected to rise by 1 mb/d to 54.4 mb/d.

OPEC crude supply hit 12-month lows in January, off by 100 kb/d m o m to 30.34 mb/d despite slightly higher output in Saudi Arabia and Kuwait. OPEC NGL supply was cut by 100 kb/d for 1Q13, partly due to the effect of a terrorist attack in Algeria. The 'call on OPEC crude and stock change' for 1Q13 was cut by 100 kb/d, to 29.7 mb/d.

OECD commercial stocks edged down by 22 mb in December to 2 688 mb, less than the average draw for that month. Crude and 'other products' led the decline while gasoline and middle-distillate stocks increased. Total products now cover 30.4 days, 0.4 day higher than at end-November.

The estimate of global refinery crude runs has been cut to 75.1 mb/d for 1Q13 but remains up by 515 kb/d on 4Q12. Plant maintenance slashed US runs in January, but Asian runs hit new highs ahead of Chinese maintenance. Strong Atlantic Basin gasoline cracks, resilient gasoil cracks and narrowing fuel oil discounts lifted January margins.

Yesterday afternoon the EIA released their Short Term Energy Outlook. As mentioned above they raised their projection for oil demand growth for 2013. Following are the main oil related highlights from the EIA report.

Market fundamentals and expectations strengthened in January 2013 because of earlier-than-expected cutbacks in Saudi Arabian oil production and greater optimism about economic growth, particularly in China, which have supported higher oil prices. EIA expects oil markets to tighten in the first quarter of 2013, but increasing global supply more than offsets higher global consumption through the rest of the forecast period. Projected world supply increases by 1.1 million bbl/d in 2013 and 2.0 million bbl/d in 2014, with most of the growth coming from outside the Organization of the Petroleum Exporting Countries (OPEC). North America will account for much of this growth. Projected world liquid fuels consumption grows by an annual average of 1.0 million bbl/d in 2013 and 1.4 million bbl/d in 2014. Countries outside the Organization for Economic Cooperation and Development (OECD) drive expected consumption growth.

World liquid fuels consumption grew by 0.9 million bbl/d in 2012 to reach 89.2 million bbl/d. EIA expects that this growth will pick up in 2013 and accelerate in 2014 because of a moderate recovery in global economic growth; consumption reaches 90.2 million bbl/d in 2013 and 91.6 million bbl/d in 2014. Non-OECD Asia is the leading regional contributor to expected global consumption growth.

OECD liquid fuels consumption declined by 0.4 million bbl/d in 2012. EIA projects OECD consumption to further decline by 0.3 million bbl/d in 2013 because of declining consumption in Europe. OECD consumption flattens in 2014 as European consumption begins to flatten in response to higher economic growth.

China's economy has improved since the third quarter of 2012. as key manufacturing indexes and refinery crude oil inputs have increased. Infrastructure investment and consumer spending indicate signs of strong economic growth in China, although not at the high rates seen in recent years. EIA also expects refinery crude oil inputs to be bolstered in 2013 as oil product inventories are restocked and new refining capacity comes on line. EIA estimates that liquid fuels consumption in China increased by 380,000 bbl/d in 2012, and will increase by 450,000 bbl/d in 2013 and by 470,000 bbl/d in 2014.

EIA projects non-OPEC liquids production will increase by 1.2 million bbl/d in 2013 and by another 1.4 million bbl/d in 2014. North America accounts for about two-thirds of the projected growth in non-OPEC supply over the next two years because of continued production growth from U.S. tight oil formations and Canadian oil sands. EIA has slightly lowered its forecast for the growth in Canadian oil production in 2013, due in part to further delays in initial production from the Kearl oil sands mining project.

OPEC member countries, particularly Saudi Arabia, cut production heavily in fourth-quarter 2012, which contributed to an increase in crude oil prices at the start of 2013. Projected OPEC crude oil supply decreases by 0.3 million bbl/d in 2013 from the year before and then rises by 0.3 million bbl/d in 2014. Most of the decline in 2013 comes from Saudi Arabia, which responds to non-OPEC growth and increasing production from some OPEC members, such as Iraq, Nigeria, and Angola. In Angola, output at the BP-operated PSVM (Plutão, Saturno, Vénus, and Marte) development recently came on line. Production at PSVM is expected to build this year and peak at 150,000 bbl/d in 2014.

EIA estimates that OECD commercial oil inventories at the end of 2012 totaled 2.66 billion barrels, equivalent to 57.2 days of supply. Projected OECD oil inventories fall slightly and end 2013 at 2.63 billion barrels (56.4 days of supply). Inventories increase slightly to 2.69 billion barrels (57.8 days of supply) by the end of 2014.

Yesterday's API report showed a surprise draw in crude oil, a surprise draw in gasoline and a draw in distillate fuel that was within the expectations. Total crude oil stocks decreased by 2.3 million barrels versus an expectation for a modest build. Gasoline showed a draw in inventory while distillate fuel stocks decreased within the forecasts. The API reported a 2.3 million barrel draw in crude oil stocks versus an industry expectation for a modest build of around 2.5 million barrels as crude oil imports decreased along with a small decline in refinery run rates by 0.2%. The API reported a modest draw in distillate and in gasoline stocks.

The API report is mildly bullish as total stocks declined. The oil market is mostly higher heading into the US trading session and ahead of the EIA oil inventory report at 10:30 AM today. The market is usually 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 PADD 2 stocks decreased by 0.6 million barrels while Cushing stock decreased by 1.1 million barrels. On the week gasoline stocks decreased by about 0.8 million barrels while distillate fuel stocks decreased by about 1.6 million barrels.

My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to decrease marginally. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was very winter like over the east coast... and a small build in gasoline stocks during the report period even as refinery runs continue to decline ahead of US maintenance season. I am expecting crude oil stocks to increase by about 2.5 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 35.1 million barrels while the overhang versus the five year average for the same week will come in around 39.9 million barrels.

I am expecting a build in crude oil stocks in Cushing, Ok and in PADD 2 as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading well above the level it was trading at just prior to the Seaway pipeline announcement.

With refinery runs expected to decrease by 0.2% I am expecting a small build in gasoline stocks. Gasoline stocks are expected to increase by 0.3 million barrels which would result in the gasoline year over year surplus coming in around 2.2 million barrels while the surplus versus the five year average for the same week will come in around 3.7 million barrels.

Distillate fuel is projected to decrease by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 15.1 million barrels below last year while the deficit versus the five year average will come in around 16.6 million barrels.

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 not in directional sync with this week's projections. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for just about everything in the complex.

I am maintaining my view of WTI at neutral to cautiously bearish and maintaining my view at neutral bias to cautiously bullish for Brent and the rest of the complex. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling. Furthermore the Brent contract is approaching a key technical resistance level of about $118/bbl and could have trouble breaching it in the short term.

I am downgrading my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bearish at the moment.

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

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


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