Much like the rest of the global risk asset markets the oil complex has traded in negative territory throughout the entire session on Wednesday and into this morning's trading so far. If oil remains lower today it will mark the eight day in a row of declining oil prices or the longest downside streak since 2009 when the recession was in full bloom. The main three price drivers for oil have all broken down over the last week or so and continue to suggest that prices may be in for another leg lower in the short to medium term.

The main catalyst that has pushed oil prices to triple digit highs during the first quarter of the year was all related to the growing tensions between the West and Iran. For the time being those tensions have eased and remain at the least elevated level so far in 2012. This has contributed to the strong sell-off or the receding of the geopolitical risk premium over the last two weeks in particular. At the moment the risk of a supply interruption is low compared to where it was just a few months ago. For now diplomacy backed with strong sanctions seems to be progressing.

Moving over to the demand side of the balance the global economy is slowing in all corners for the world including the main economic and oil demand growth engine of the world...China. In addition the EU is not only faced with a regional economy that is very close to a double dip recession but it is in the midst of another round of issues associated with Greece as well as several other southern EU member countries insofar as their sovereign debt problems are concerned. On top of all of that the elections in France last Sunday may be opening the door for disagreement on how best to solve the EU issues... continue the course of austerity or a large infusion of government funds into the economy. Uncertainty and confusion only results in a bearish sentiment. For now the current and projected oil demand pattern is not likely to result in a surge in oil prices anytime soon. In fact the demand side of the equation is currently biased to the bearish side.

The way the global equity markets have been trading also support the premise of a slow growth global economy. The EMI Global Equity Index is now down by 2.5% on the week as shown in the following table. The year to date gain has narrowed to 5.1% or only about a third of the highs hits back in March. Three of the ten bourses remain in negative territory with no bourses showing double digit gains for the year. The Index has given back about 65% of its gains for the year suggesting that more and more participants are buying into the slow growth scenario. Equities are presenting a bearish view for economic growth and are also bearish for oil and the broader commodity complex.
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Finally the technical have broken down over the last week with short term support areas at the lows made in the first hour of trading on Sunday night. For WTI that level is around $95.34/bbl while Brent support is at $110.34/bbl. So far the market has made several attempts at breaching this level with WTI actually dropping below its support intraday (yesterday) but failing to remain below this key short term level. If this level holds we could be setting up for a $95 to $100/bbl trading range for WTI. If not the next stopping point for WTI is around the $92/bbl level. At the moment the technicals are biased to the bearish side but could move into a consolidation pattern if the Sunday lows are not solidly breached in the next day or so.

OPEC released their monthly oil market report. The IEA will release their report tomorrow morning. Following are the highlights of the OPEC market assessment.

After three consecutive monthly gains, the OPEC Reference Basket declined in April to settle at$118.18/b, representing a drop of $4.79 or 3.9%. Prices remain elevated by the risk premium associated with ongoing geopolitical factors. The decline in the value of the Basket came with the start of the first month of the typically low demand season in the second quarter. Crude prices shifted into contango for the first time in over a year amid higher supplies and weak consumption. The decline in crude oil prices occurred as refined product prices came down from the peak levels seen in previous months. Moreover, rising global supply contributed to an increase in inventories, preventing prices from moving higher. On 9 May, the OPEC Reference Basket stood at $109.85/b.

World economic growth expectations for 2012 remain unchanged at 3.3%. The US continues to enjoy solid momentum, with the growth forecast revised up by 0.1 pp to 2.3%. In contrast, the Euro-zone continues to weaken and is now expected to contract by 0.4%, compared to the minus 0.3% forecast in the previous month. The growth forecast for Japan remains unchanged at 1.8%. With these offsetting revisions in the OECD, growth in the export-led emerging economies is also unchanged. India is expected to expand by 6.9% in 2012, while China is projected to grow at a solid 8.2%. Overall, the global economic outlook remains fragile, with heightened uncertainties in the Euro-zone and potential spill-over effects in the emerging markets.

World oil demand growth in 2012 now stands at 0.9 mb/d, broadly unchanged from the previous report. Given the stabilization of the US economy and the shutdown of Japanese nuclear power plants, world oil demand growth has - at least for the short-term - stopped its declining trend and is showing some growth. Oil demand in non-OECD countries is also indicating a slight improvement. The upcoming driving season in the US might be affected by higher retail gasoline prices and uncertainty regarding economic developments. Japan's oil usage also could slow if the country were to restart its nuclear plants.

Non-OPEC supply is forecast to grow by 0.6 mb/d in 2012, following an increase of 0.1 mb/d in 2011. This represents an upward revision of 50 tb/d over the previous report. The adjustment to this year's growth was mainly due to the release of preliminary 1Q12 data for actual production, particularly for the US. OPEC NGLs and non-conventional oils in 2012 are expected to increase by 0.4 mb/d over the previous year. In April, total OPEC crude oil production, according to secondary sources, was estimated to average 31.62 mb/d, an increase of 0.32 mb/d over the previous month.

Product markets showed an uptick in April with gasoline taking advantage of the improved product sentiment in the Atlantic Basin, ahead of the driving season. This, along with the additional support from tight product supplies in the Asian region amid heavy refinery maintenance allowed refinery margins to increase across the globe. The decline in crude oil prices also supported product markets.

The tanker market saw mixed movement in April, with VLCC spot freight rates increasing and Suezmax and Aframax spot rates encountering declines. Lower tonnage demand and refinery maintenance drove the decline in Suezmax and Aframax rates. The rise in VLCC spot freight rates was supported by higher demand and floating storage requirements. In April, OPEC spot fixtures decreased by 20%. Sailings from OPEC were higher and arrivals in North America increased.

US commercial oil stocks in April reversed the build of the previous month, declining by 4.3 mb. US stocks remain 20.1 mb above the year-ago level and 30.8 mb over the five-year average. Products, which fell by 17.5 mb, were responsible for the decline, as crude stocks rose by 13.5 mb. In Japan, the most recent monthly data shows that commercial oil stocks increased by 6.6 mb in March to stand 1.4 mb above a year ago, which was still 5.2 mb below the five-year average. The total stock-build was concentrated in crude, which rose by 8.5 mb, while product inventories fell 1.9 mb.

Demand for OPEC crude for 2011 remained unchanged from the previous assessment to stand at 30.1 mb/d, indicating growth of 0.4 mb/d compared to the previous year. Demand for OPEC crude for 2012 is projected to average 30.0 mb/d, the same level as in the previous report and representing a decline of 0.1 mb/d from last year.

Wednesday's EIA inventory report was mixed to biased to the bullish side even as it showed a small increase in total stocks, a larger than expected build in crude oil stocks but larger than forecast draws in both gasoline and distillate fuel. Total implied demand increased across the board for all refined products. Refinery utilization rates modestly on the week to 86.4% of capacity an increase of 0.4% in refinery run rates. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
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Total commercial stocks of crude oil and refined products increased by 1.5 million barrels after increasing modestly the week before the previous week. The year over year surplus narrowed to 23.6 million barrels while the surplus versus the five year average for the same week decreased to 34.5 million barrels. By all measurements total oil supply in the US is still balanced to comfortable irrespective of the evolving geopolitical risk at the moment.

Crude oil inventories increased (by 3.8 million barrels) versus an expectation for a smaller build. Crude oil inventories are now well above the levels they were at during the height of the recession as well as being at the highest level since 1990. With an increase in stocks this week the crude oil inventory status versus last year is now showing a surplus of around 9.2 million barrels while the surplus versus the five year average for the same week came in around 24.5 million barrels. PADD 2 crude oil inventories increased by about 1.9 million barrels while Cushing, Ok crude oil inventories also increased by about 1.2 million barrels on the week.

Crude oil inventories in the mid-west region of the US have been building of late with stocks in Cushing now at the highest level it has been at since March of last year. The increase in inventories this week is mostly bullish for the Brent/WTI spread. The spread has continued to widen over the last week on a combination of growing inventories in the mid-west as well as production problems in the North Sea.

Distillate stocks decreased strongly versus an expectation for a small seasonal build. Heating oil/diesel stocks decreased by 3.3 million barrels. The combination of a robust export market and an early start to the planting season pushed distillate implied demand higher on the week. The year over year deficit came in around 23.5 million barrels while the five year average remained in a deficit of about 13 million barrels.

Gasoline inventories declined strongly and greater than the expectations as a result of the industry's transition to summer grade gasoline. Total gasoline stocks decreased by about 2.6 million barrels on the week versus an expectation for a build of about 0.2 million barrels. The surplus versus last year came in at 1.3 million barrels while the deficit versus the five year average for the same week was about 27.6 million barrels.

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 but one that is biased to the bullish side on the week as both gasoline and distillate fuel declined on the week.
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I am keeping my view to cautiously bearish after oil broke down on all fronts last week with a continuation to the downside to open trading for the week. Oil is now solidly below the trading range it has been in for the last month or so and well below several key support areas. WTI is now solidly trading in double digits with Brent currently holding up a tad better.
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I am keeping my view at neutral and keeping my bias also at neutral with an eye toward the upside. The surplus is still building in inventory versus both last year and the five year average and could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.

Currently markets are lower 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.