The oil market was hit with a one -two punch that has sent prices toward the lower end of the trading range. First the latest minutes from the last US Fed FOMC meeting suggested that the Fed may be backing away from additional stimulus or a QE3 which is a positive for the US dollar and an overall negative for oil and the broader commodity complex. Second the API reported another huge build in crude oil inventories of close to 8 million barrels (see below for a more detailed discussion) but yet to be confirmed by the more widely followed EIA inventory report (released today at 10:30 am). Yesterday was an overall bearish day for the secondary price drives of the oil complex as the geopolitical risk in the market remains present but overall quiet.

Even with oil prices declining over the last twenty four hour I am still expecting prices to remain in the $102 to $107/bbl trading range for the next several weeks (at least) as the Iran/West meetings approach. Geopolitical risk will continue to be the main price driver with oil fundamentals and the state of the global economy still playing a secondary role. Even with the news that a QE3 may not be in the cards along with US manufacturing data that came in below expectations yesterday and API stocks that built more than expected the downside reaction has still been somewhat muted. Geopolitics is serving as a price floor at the moment in what otherwise would have been a much steeper drop in oil prices. In fact absent another round of stimulus without the possibility of a supply interruption in and around the Middle East oil prices (basis WTI) would likely be back the mid $90's.

The Fed minutes were also discouraging to the risk asset market bulls as values have declined across the board for just about all commodity and equity markets. On a positive note the Fed's cooling on the idea of more stimulus suggests that they view US economic growth as starting to stabilize and likely to continue on its own. In addition if the Fed is not going to add more stimulus to the market it is a positive for reducing the potential inflation risk while opening the door for the next move by the Fed which might be to start to suggest that the easy money policy may be slowly coming to an end.

Global equity markets resumed their corrective downtrend after the release of the Fed minutes as shown in the EMI Global Equity Index table below. The EMI Index lost almost 1% over the last twenty four hours narrowing the year to date gains to 11.1% while pushing this week's activity back into negative territory for the week. The Index is now back to the level it was at back in early February. The downside correction is now around 4%. Absent a new round of QE by the US market participants are going to focus solely on the evolving economic picture for the individual global markets...many of which are moving in slow motion. We could see further downside moves in the global equity markets unless the macroeconomic data starts to show that the recovery is picking up steam. For the moment the global equity market are also a negative for oil prices as well as the broader commodity complex.
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The API report showed a much larger than expected build in crude oil stocks, a surprisingly large draw in gasoline stocks along with a surprise decline in distillate fuel inventories. The API reported a strong build (of about 7.8 million barrels) in crude oil stocks versus an expectation for a modest build in crude oil inventories as crude oil imports increased even as refinery run rates also increased by 0.2%. The API reported a large draw in gasoline stocks and a surprise draw in distillate stocks versus an expectation for a more seasonal build in inventories.

The report is bearish for crude oil but neutral to bullish for refined products. The market has drifted lower since the report has been issued but on relatively low volume. The market is always cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out tomorrow. The API reported a build of about 7.8 million barrels of crude oil with a build of 1 million barrels in PADD 2 which is bullish for the Brent/WTI spread. On the week gasoline stocks declined by about 4.5 million barrels while distillate fuel stocks decreased by about 1.4 million barrels.
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At the moment oil prices are still being mostly driven by the tensions evolving in the Middle East between Iran and the West (as discussed above) and to a secondary extent based on the direction of the euro and the US dollar as well as by a view that China's economy is starting to slow. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data suggesting that this week's oil inventory reports may not have a major impact on price direction. 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 inventory report this week with a modest build in crude oil and distillate fuel inventories and a decline in gasoline stocks along with a modest increase in refinery utilization rates. I am expecting a draw in gasoline inventories as well as a modest build in distillate fuel stocks as winter like weather was absent for most of the US during the report period...in particular the east coast. I am expecting crude oil stocks to increase 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 come in around 2.4 million barrels while the overhang versus the five year average for the same week will widen to around 10.4 million barrels.

Even with refinery runs expected to increase by 0.3% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 0.9 million barrels which would result in the gasoline year over year surplus coming in around 5.8 million barrels while the deficit versus the five year average for the same week will come in around 12.2 million barrels.
Distillate fuel is projected to increase by 0.5 million barrels on a combination of steady exports but warmer than normal weather last week. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 17.2 million barrels below last year while the surplus versus the five year average will come in around 3.5 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 for the same week the inventory changes are mostly in directional sync with the projections for this report. As such if the actual data is in line with the projections there will be not be much of a change in the year over year comparisons for most of the complex.
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I am keeping my bias at cautiously bullish with a big emphasis on the word cautious. I am expecting the oil complex basis WTI to remain in a trading range of $102 to $107/bbl for the next several weeks. Geopolitics will remain the main price driver leading up the Iran/West meetings on April 13/14th.
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I am still keeping my view at and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season. As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.

Nat Gas futures have continued in a mild short covering rally after last week's strong 10% decline in prices. So far the futures market has recovered about $0.06/mmbtu this week after losing $24.7/mmbtu last week. Thus you can see that the rally so far this week can only be categorized as minor and corrective...not a change in the underlying structure of the market which remains in a long term downtrend. The catalyst for this week's short covering rally driven has been by a combination of a bit cooler short term temperature forecast as well as some book squaring ahead of the long holiday weekend.

Currently markets are lower as shown in the table below.

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