The markets are now solidly in the hands of the EU leadership as yet another summit gets under way. Today is a carryover from Sunday's meeting and one that is hoped by all that the EU will finally come up a with a long lasting and durable solution to a debt crisis that has been lingering for way too long and impacting the global economy as well as risk asset markets for way too long. The issues that have been intensely debated for the last week or so is the shape of the second Greek bailout, the recapitalization of the banks and how to lever and make the EFSF bailout fund more potent. Simply put if the Europeans do not come out with a credible plan today there will be another sell-off in all markets as we started to see during the US trading session yesterday. The EU needs to take the bull by the horns and once and for all really convince the world that they have a solid grip on the problem with a very effective solution to push it to the background so the EU economies can move forward and not backwards. The time for bickering is over and if they truly want to function as a European Union it is time to unify their thinking and finally just do it.

Heading into the meeting most risk asset markets are pretty much on hold. As the day progresses the markets will definitely be moving on every 30 second news snippet hitting the media airwaves about Europe and what or what may not be going on at the meeting. For the moment everything else will be playing a secondary role in risk asset price setting including today's EIA oil inventory report as well as any macro economic data or corporate earnings that hit the street today. That said oil has performed reasonably well during yesterday's risk asset sell-off and has continued to hold onto this week's gains even as the API reported a larger than expected build in crude oil stocks (see below for more details). The oil market has viewed comments by China's Wen Jiabao today regarding studying potential simulative policies for smaller companies as a sign that China may be moving back toward a more accommodative monetary policy and one that could result in an increase in oil consumption (as well as other commodity consumption).

The selling in the equity markets that began during the US trading session yesterday did not carry through to Asia or in Europe so far this morning as shown in the EMI Global Equity Index table below. The Index has lost about 0.6% over the last twenty four hours but the selling has subsided as all market participants await the outcome of the EU summit. The Index is still well below the 20% bear market threshold showing a year to date loss of 14.7%. The US Dow remains in positive territory for the year with six of the ten bourses in the Index still showing double digit losses for the year. Brazil continues to be the worst performer in the Index. Equities are a neutral for oil prices at the moment as everything is caught up in a macro market led by the EU meeting.
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The API data was mixed and directionally a bit out of sync with most of the projections...including my projections. The API reported a large than expected build in crude oil inventories of about 2.7 million barrels as crude oil imports increased by about 619,000 barrels per day while refinery run rates declined marginally by 0.2%. The API reported a surprise build in gasoline stocks and a draw in distillate fuel inventories that was within the range of expectations.
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The market was expecting a smaller build in crude oil stocks and a modest draw in gasoline and distillate fuel inventories this week. The report is overall neutral with a bias to the bearish side but it has not resulted in any significant action coming into the market since the data was released late yesterday afternoon. The market remains hostage to the outcome of the European summit as discussed above with inventory data a secondary driver. The API reported a build of about 2.7 million barrels of crude oil with a 1.0 million barrel build in Cushing and a draw of 1.4 million barrels in PADD 2 which is neutral to bearish for the Brent/WTI spread which is back on the defensive once again. The bulk of the build was in PADD 3 or the Gulf region showing an increase of about 4.8 million barrels. On the week gasoline stocks increased by about 0.2 million barrels while distillate fuel stocks drew by about 1.8 million barrels. The more widely watched EIA data will be released this morning after the market has paid little if any attention to the API data so far. Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today.

With Europe still in a state of turmoil and uncertainty it is not clear if this week's oil inventory reports will have any major impact on price direction. At the moment all market participants are continuing to follow the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil. As such this week's oil inventory report is likely to remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report.

My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed report with builds in crude oil and draws in refined products along with a marginal decrease in refinery utilization rates which should result in a mostly neutral weekly fundamental snapshot. I am expecting a modest build in crude oil stocks with a small decrease in refinery utilization rates. I am expecting a modest draw in gasoline inventories and distillate fuel stocks. I am expecting crude oil stocks to increase by about 1.7 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 26.6 million barrels while the overhang versus the five year average for the same week will narrow to around 2.5 million barrels.

With refinery runs expected to decrease by 0.2% I am expecting a modest draw in gasoline stocks as demand was likely flat at best last week. Gasoline stocks are expected to decline by about 2.0 million barrels which would result in the gasoline year over year deficit widening to around 15.1 million barrels while the deficit versus the five year average for the same week will widen to around 4.6 million barrels.

Distillate fuel is projected to decrease modestly by 1.5 million barrels on a combination a decrease in production and a possible increase in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 21.8 million barrels below last year while the overhang versus the five year average will narrow to around 0.3 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 experienced a mixed report with modest builds in crude oil and gasoline and a seasonal draw in distillate fuel. Thus based on my projections the comparison to last year will result in a modest level of restocking for crude oil but a destocking for both distillate fuel oil and gasoline inventories.
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Hurricane Rina is currently moving across the warm waters east of Belize toward the Mexican Peninsula but away for the major oil producing regions of the Gulf of Mexico. The latest projections from the National Hurricane Center are suggesting that the storm will steer away from the Gulf producing regions of the US and Mexico and will not become a threat to oil and Nat Gas producing operations and as such it is still a watcher and not something that warrants any price defensive action at this stage of its life. The storm is expected to turn east over the weekend and head into the waterways between Cuba and South Florida on its way out into the Atlantic. There is also a wave in the south central Caribbean that now has only a 10% chance of strengthening over the next forty eight hours. For now we remain in a watching pattern rather than action pattern.

With WTI still trading above the $91/bbl level I have to keep my view at bullish which will is in sync with my bias. As mentioned above it still remains all about Europe and if it is solved the markets will react positively and there will be a relief rally. If not keep your seat belts fastened. As the market is poised to react based on the outcome in Europe the risk/reward of being in the market is still not very favorable. However, for the short term traders the long side is where the momentum is at the moment. A solution by the Europeans will likely result in WTI slowly working its way toward a test of the triple digit level. If they fail we will be saying hello to $75 to $80/bbl WTI once again.
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Although I am still bearish I am not expecting Nat Gas prices to fall precipitously over the short term (next few days). The fact that the spot futures contract remains around support/resistance suggests the market may try to move higher in the short term. As such I am keeping my guidance at neutral with a bearish bias to see how price activity plays out over the next several trading session especially leading up to this week's expected bearish inventory report.

In spite of mostly bearish news permeating all risk asset markets on Tuesday...including Nat Gas... the futures market was able to hold onto gains throughout the session and stay above the key technical support area of $3.61/mmbtu for the soon to expire Nov contract. The key technical support level for the soon to be spot Dec contract is around the $3.76/mmbtu level with resistance around $4/mmbtu. The Nov contract expires on Thursdays and as such I will stop covering that contract and focus my comments on the Dec contract going forward. I still view Nat Gas as bearish but as I have been saying for well over a week the market is continuing to signal to all that it does not want to go much lower at this point in time irrespective of the fact that this is a bearish commodity from all angles.

Currently as a new day of trading gets underway in the US markets are mixed as shown in the following table.

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