Skepticism over Europe's ability to solve its sovereign debt problems has continued to be the main price driver for oil and most all risk asset markets. Although not much of anything has changed since the meeting in Europe on Friday the market has decided that the risks are higher today than they were a few days ago. In addition when the results of the US Fed FOMC meeting were announced yesterday afternoon the markets also sold off even though the outcome was as expected and was pretty much identical to last month's outcome. In fact the Fed actually acknowledged some minor improvements in the US economy.

I must admit I am out of sync in my thinking compared to that of the market outcome. I viewed yesterday's FOMC results as a neutral to even slightly supportive outcome. I also view the evolving situation in Europe as not getting any worse than it was before the ECB and EU meeting and the basics now seem to be in place for the potential for a slow and tedious recovery. Obviously the markets have been trading with a sentiment that is not in sync with my views. In fact the way the markets have been trading suggests that Europe is on the cusp of collapse and after the sell-off from the FOMC meeting the market traded as if the US economy was back on the cusp of a double dip recession....even though nothing has changed. We will have to see how the markets continue to digest the evolving situation in Europe as well as the US.

The selling has spread throughout the global equity markets as shown in the EMI Global Equity Index table below. Over the last twenty four hours the Index lost another 0.3% widening the week to date loss to 2% resulting in the 2011 loss coming in at 15.8%. The US Dow is still in positive territory for the year and that is pretty much where the good news ends. Eight of the remaining nine bourses in the Index are still showing double digit losses with Hong Kong now clearly back in bear market territory with a 2011 loss of 24.7% as well as China which is now showing a loss of 20.6%. As I mentioned above the markets are bearish and have discounted just about every piece of positive news and have embraced anything bearish. Obviously the global equity markets are a negative price driver for oil and the broader commodity complex.
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Today OPEC meets in Vienna and all signs point to OPEC keeping production pretty much at current levels and as I mentioned last week simply making an adjustment in the official ceiling to 30 million barrels per day (which is what they are producing right now). So no cut , no increase and thus it looks like the meeting will be a non-event. It is not clear as to how the market will ultimately digest the outcome especially with the evolving situation in Iran .

The API data showed across the board builds. The API reported a small build in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 0.5 million barrels as crude oil imports increased and refinery run rates also decreased by 1.4%. The API reported basically no change in gasoline stocks versus projections for a modest build and an expected build in distillate fuel inventories.
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The market was expecting a modest draw in crude oil stocks and a modest build in gasoline and distillate fuel inventories this week. The report is somewhat bearish for the entire complex. That said the report has resulted in selling in the market overnight. The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver. The API reported a build of about 0.5 million barrels of crude oil with a 0.1 million barrel build in Cushing and a build of about 1 million barrels in PADD 2 which is bullish for the Brent/WTI spread which has been somewhat range bound since the middle of November. On the week gasoline stocks were about unchanged while distillate fuel stocks built by about 1.2 million barrels. The more widely watched EIA data will be released this morning. 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.
Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe moves into the background. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe and the US are still in the midst of uncertainty suggesting that this week's oil inventory reports may not have a 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. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. As such this week's oil inventory report could 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 a modest increase in refinery utilization rates which should result in a neutral weekly fundamental snapshot. I am expecting a modest draw in crude oil stocks with an increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and another build in distillate fuel stocks. I am expecting crude oil stocks to decrease by about 1.9 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 11.8 million barrels while the overhang versus the five year average for the same week will come in around 7.8 million barrels.

With refinery runs expected to increase by 0.4% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by about 1.0 million barrels which would result in a gasoline year over year surplus of around 1.2 million barrels while the surplus versus the five year average for the same week will come in around 7.1 million barrels.

Distillate fuel is projected to increase modestly by 1.0 million barrels on a combination an increase in production and a possible decrease in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.3 million barrels below last year while the deficit versus the five year average will come in around 2.1 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 pretty much the same directional moves as the projections for this week's inventory report but with a significant draw in crude oil stocks. Thus based on my projections the comparison to last year will result in a minimal year over year change in refined product inventories only.
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Keep in mind as we are getting closer to the end of the year and as such we can expect to see surprise outcomes and possibly big crude oil declines as the industry starts managing their LIFO inventory programs.

WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals and geopolitics I am still keeping my view and bias at cautiously bullish. In addition the cloud of uncertainty got a tad smaller last week in Europe after the Summit and the ECB meeting but we will have to continue to watch Europe closely as the sentiment seems to be changing back to a more negative bias. WTI & Brent are still in sync with the direction of the US dollar and euro but are also being driven by the ongoing geopolitical situations in the middle east.
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I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.

Nat Gas made new year to date lows almost immediately upon the start of trading on Sunday night and has been hovering around these new low levels ever since. There continues to be nothing that is bullish with just about every driver still bearish and suggesting that even lower prices are possible even though it is the middle of December. The latest short term weather forecast from NOAA (released late yesterday afternoon) is more bearish than those released on Friday. The six to ten day and eight to fourteen day forecasts are both showing mostly normal to above normal temperatures through the 26th of December with only a small patch of below normal temperatures in the southwest. The main population or high Nat Gas areas of the country are still mostly experiencing a mild winter and thus a normal to low demand pattern for Nat Gas.

About the only non-bearish fact about Nat Gas at the moment is the futures market is somewhat oversold and a short covering rally is possible at any time. That said I do not see anything looming that would result in Nat Gas moving into a sustainable uptrend rally. Unless winter weather arrives and engulfs a large portion of the US Nat Gas futures prices may not even trade above $4/mmbtu during the remainder of the winter heating season. The main feature of the winter heating season so far has been the fact that the surplus of gas in inventory versus both last year and the five year average has widened and is projected to continue to widen for at least another several weeks at a minimum.

Currently as a new day of trading gets underway in the US markets are lower.
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Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.