Yesterday was clearly a risk off day for most all of the commodity markets including the oil complex while the equity markets in the west were flat to slightly lower. The main price driver for the risk asset markets was additional macroeconomic data points that continue to suggests the global economy is slowing. Across the board in the euro zone the all of the PMI data came in lower than expected suggesting that not only is the EU economy slowing it is looking more and more like it may enter into a double dip recession. Some of the main underperformers in the EU like Spain are already in a recession along with Greece. The likelihood of Europe having a positive impact on oil demand in the next year or so is very low. Oil demand growth in this part of the world is likely to contract.

In the US market participants turned their focus away from the conflicting manufacturing sector and moved to the lead up to the major nonfarm payroll data on Friday. The first shot over the bow was a bearish one as the ADP private sector job survey came in significantly below all of the estimates suggesting that Friday's nonfarm payroll number may also underperform. In addition the Challenger layoff data this morning showed an increase in layoffs in April versus March. All signs continue to point to the US economy moving into another slow patch that may last for the medium term. The likelihood of the US market having a major positive impact on oil demand growth this year is also very low. In fact I expect oil consumption to remain in a contraction trend that has been in place since 2007.

With the geopolitics risk in the Middle East easing the likelihood of a supply interruption has also been easing. Thus the possibility of a supply driven price rise in oil is low at this point in time and will remain low as long as there is movement toward a resolution from the current diplomatic efforts backed with strong sanctions. In fact I am starting to place a slightly higher probability that there will be a resolution worked out over the next several months. I think Iran is looking for a way out without losing face in the Middle East as sanctions are impacting the Iranian economy. On the other side I also believe the West is looking for a way out other than a military solution especially while the western economies are struggling to stay out of recession as well as the fact that it is an election year in the US. I am of the view that the Iranian risk premium will continue to gradually recede from the price of oil.

The global equity markets which are also a good leading indicator as to where the forward global economies are heading has also been suggesting a slow growth period is in place. The global equity markets peaked in early March and have been in a downside correction since then...although the downside moves have been tempered of late as many of the markets starting to enter a consolidation pattern. The EMI Global Equity Index (table below) has gained 1% on the week (so far) in spite of the bearish macroeconomic data that has hit media airwaves this week. The year to date gain has widened to 9.8% but is still well below the high of the year made in early March.
The trading pattern that is evolving this week is starting to look like it is starting to discount the bearish economic data from the perspective that we may be entering a period where bad economic news may be good news for the markets as additional easing via a QE3 could become a reality if the data continues to underperform. For the moment we may have the so called Bernanke put starting to once again emerge into the sentiment of the trading market for equities as well as the broader commodity complex. The test of this view will come on Friday if the nonfarm payroll data comes in below the consensus versus expectations for around 160,000 to 170,000 new jobs.

Wednesday's EIA inventory report was mixed to biased to the bearish side as it showed a modest 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 declined as demand decreased for both gasoline and distillate fuel. Refinery utilization rates increased strongly on the week to 86% of capacity an increase of 1.3% 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
Total commercial stocks of crude oil and refined products increased by 1.9 million barrels after coming in unchanged the previous week. The year over year surplus narrowed to 36 million barrels while the surplus versus the five year average for the same week increased to 42.4 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 2.8 million barrels) versus an expectation for a smaller build. With an increase in stocks this week the crude oil inventory status versus last year is now showing a surplus of around 12.7 million barrels while the surplus versus the five year average for the same week came in around 25.6 million barrels. PADD 2 crude oil inventories increased by about 1.2 million barrels while Cushing, Ok crude oil inventories also increased by about 1 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. However, the spread has continued to narrow since the inventory report was issued as it is currently being impacted more by the easing of tensions in Iran as well as the early start of Seaway and the easing of the tensions between the West and Iran
Distillate stocks decreased strongly versus an expectation for a small seasonal build. Heating oil/diesel stocks decreased by 1.9 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 22.5 million barrels while the five year average remained in a deficit of about 1.6 million barrels.

Gasoline inventories declined strongly and much greater than the expectations as a result of the industry's transition to summer grade gasoline. Total gasoline stocks decreased by about 2.0 million barrels on the week versus an expectation for a draw of about 0.8 million barrels. The surplus versus last year came in at 4.1 million barrels while the deficit versus the five year average for the same week was about 25 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 being bearish on the week as both gasoline and distillate fuel declined on the week.
I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $106/bbl. At the moment the oil complex is still going through a spread realignment driven by a reduction in the tensions in the Middle East and thus a receding of the Iranian risk premium along with a sentiment swing in the Brent/WTI spread due to the early start of the Seaway pipeline. I am more comfortable staying on the sidelines today for the flat price market.
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 mixed as shown in the table below.

Best regards,
Dominick A. Chirichella
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