The spot WTI contract held range support and has now moved back to the middle of its trading range on the last day of trading for the March Nymex WTI contract. The soon to be spot April contract has been in a trading range (since the middle of January) of about $99/bbl on the upside and $95.40/bbl on the lower end. At the moment the contract is trading in the middle of its trading range. Both range support and resistance have been successfully defended several times since January. For now I would expect more of the same unless a strong directional catalyst emerges.

On the other hand the spot Brent contract has broken below its upward trending channel that was in play since mid-January. It is trading below the key technical level of $118/bbl with the possibility of the contract moving to test the next support level of about $115/bbl. It has now been trading below the $118/bbl level for five trading sessions and barring a surprise upside price direction catalyst emerging Brent should remain biased to the bearish side.

As I discussed in yesterday's newsletter the April Brent/WTI spread failed to breach the upside range resistance level and has traded down toward the $19.70/bbl support level. For those who entered the spread from the short side the market is close to the original objective and if the $19.70/bbl support level holds we could get another move back to the upside. If support is breached the next support level for the spread will be around the $18.25/bbl level.

The Seaway Pipeline operator indicated in a FERC filing that they expect to be able to average about 295,000 bpd flow through the line for the period February through May. They also went on to say that they hope to raise the throughput to 335,000 bpd but it is not expected to increase above that level due to the anticipated mix of light and heavy crude oil. This is slightly bearish for the Brent/WTI spread as it is an increase of movement of oil out of Cushing over January's levels.

Also as I have been indicating the Nymex RBOB contract is very overbought and susceptible to a round of profit taking selling. A light round hit the market yesterday with selling continuing into this morning (so far). Since peaking yesterday the April contract has lost about $0.035/gallon of its values. Certainly only a minor correction (basis the $0.40/gallon upward move for the April contract since January) so far but most importantly the April RBOB contract has now breached it upward trend channel support that has been in play since the middle of January. The next support level for the April contract is around $3.20/gallon. Unless the market gets some new fundamental support I would expect the downside correction to take the price down to the next support level.

In the area of currency wars Germany's Chancellor Merkel dismissed any thoughts of currency manipulation saying that the current value of the euro is within the currency's normal trading range. She said that euro exchange rates of between $1.30 to $1.40 are part of the normality of the history of the euro. All of that sounds good but with the Yen continuing to decline Japanese companies are continuing to see their export pricing advantage growing. Germany's equity market is underperforming most other developed world markets as it continues to be impacted by a rising euro.

Global equities recovered their losses from earlier in the week as shown in the EMI Global Equity Index table below. The EMI Index is now showing a slight gain for the week and a widening of the year to date gain to 0.5%. Brazil continues to fall deeper into negative territory for 2013 and is now showing a loss of 6% for the year to date. On the other hand Japan's bourse is now showing a double digit gain for the year as a weak Yen continues to support this export oriented economy. Germany is only showing a gain of 2%. So maybe there are no official currency wars but as it stands at the moment interrelationships among various currencies are providing an advantage for some and not for others. The balance is a bit out of sync at the moment.

This week's round of oil inventory reports will be delayed by one day (due to the US holiday) with the API data being released on Wednesday afternoon followed by the EIA report hitting the media airwaves at 11:am on Thursday. My projections for this week's inventory report are summarized in the following table. I am expecting the US refining sector to decrease marginally. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was very winter like over the east coast... and a small build in gasoline stocks during the report period even as refinery runs continue to decline ahead of US maintenance season. I am expecting crude oil stocks to increase by about 1.5 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a surplus of 33 million barrels while the overhang versus the five year average for the same week will come in around 57.4 million barrels.

I am expecting a build in crude oil stocks in Cushing, Ok and in PADD 2 as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be bullish for the Brent/WTI spread in the short term as the spread is currently trading well above the level it was trading at just prior to the Seaway pipeline announcement.

With refinery runs expected to decrease by 0.2% I am expecting a small build in gasoline stocks. Gasoline stocks are expected to increase by 0.5 million barrels which would result in the gasoline year over year surplus coming in around 2.2 million barrels while the surplus versus the five year average for the same week will come in around 6.7 million barrels.

Distillate fuel is projected to decrease by 1 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 18.6 million barrels below last year while the deficit versus the five year average will come in around 14.3 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's inventories are not in directional sync with this week's projections. As such if the actual data is in line with the projections there will be modest changes in the year over year inventory comparisons for just about everything in the complex.

I am maintaining my view of WTI at neutral to cautiously bearish and maintaining my view for Brent at neutral to cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling. Furthermore the spot Brent contract has breached its technical resistance level of about $118/bbl suggesting lower prices in the short term.

For the third week in a row Nat Gas futures are staging a short covering rally ahead of the weekly Nat Gas inventory report. The market is also getting an assist from the round of cold temperatures experienced so far this week along major parts of the country. Whether or not the rally is going to hold through the inventory report is a big question since this week's inventory withdrawal will be below both last year and the five year average and thus a bearish report.

From a technical perspective the spot Nat Gas futures contract has once again moved back into the $3.20/mmbtu to $3.50/mmbtu trading range that has been mostly in play going back to November of 2012. Since the market failed to stay below the $3.20 level I would say the very short term momentum has shifted to being more biased to an upside... assuming this week's inventory report does not make the new long side entries very uncomfortable.

I am upgrading my Nat Gas view and bias neutral as the weather forecasts and nearby temperatures are supportive. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.

Markets are mixed as shown in the following table.

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


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