Yesterday was definitely a risk off trading session with most risk assets getting hit with a strong round of selling… including the oil complex. The weekly EIA oil inventory report was mixed with a larger than expected build in crude oil but with offsetting draws in refined products (see below for a more detailed discussion on this week's report). However, the macroeconomic data hitting the media airwaves was mostly biased to the bearish side setting off a round of selling in equities adding to the negative sentiment in the oil complex and broader commodity markets.

Overnight the Japanese Central Bank doubled down on its quantitative easing program as the new head of the Bank of Japan (BOJ) asserted his presence at his first meeting since taking charge. His objective is to put an end to the 15 years of a stagnating economy with a goal of pushing inflation to the 2 percent level. The BOJ will now purchase about $79 billion (7.5 trillion Yen) of bonds a month and double the monetary base in two years. Needless to say the Yen declined strongly relative to most currencies on the news of the new and aggressive monetary program.

There is no doubt that Japan's competitors will likely voice their concern over the coming days as the falling Yen gives the export oriented economy of Japan an edge versus most of the other major export nations like China. The market will be watching how other export oriented countries react to the falling Yen and whether or not they do anything to depreciate their currencies signaling that a currency war may be getting closer. The Yen/US dollar switch is once again approaching the lows of the year as the declining trend in the Yen that started back in November of 2012 seems to be once again gaining downside momentum.

In Europe the Bank of England (BOE) ended its meeting with no change in policy while the ECB meeting announcement of their policy will hit the media airwaves this morning. The reaction in the currency market so far today is a strong US dollar relative to just about all of the major currencies. In fact the US dollar Index has strengthened by about 0.6% versus yesterday's close. A stronger US dollar is generally a negative for oil and the broader commodity complex.

Global equities were mixed over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index actually gained ground since yesterday narrowing the loss for the week to 0.49 percent. The Index is still showing a year to date loss of 0.6 percent. The gains over the last twenty four hours were primarily attributable to a short covering rally in Brazil as well as another surge in Japanese equities after the announcement by the BOJ of their new and aggressive monetary policy. Japan and the US Dow are still the only two bourses in the Index showing double digit gains for the year while four bourses are now in negative territory for 2013 as Canada joined the negative return list today.

Yesterday's EIA inventory report was mixed with a slight bias to the bearish side as total commercial stocks only marginally decreased on the week. Overall I would categorize the report as slightly biased to the bearish side. Total commercial stocks decreased by 0.1 million barrels even as crude oil inventories increased strongly for the second week in a row. Refinery utilization rates increased by 0.6 percent to 86.3 percent of capacity after a 2.2 percent increase during the previous week suggesting that capacity is starting to return from scheduled spring maintenance. 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 decreased by 0.1 million barrels. The year over year surplus came in at 3.5 million barrels while the surplus versus the five year average for the same week held at 40 million barrels. Crude oil inventories increased (by 2.7 million barrels) versus a market expectation for a smaller build in stocks.

Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. With the decrease in stocks this week the crude oil inventory status versus last year is showing a surplus of around 23.4 million barrels while the surplus versus the five year average for the same week came in around 37.4 million barrels. Crude oil imports increased modestly on the week.

PADD 2 crude oil inventories increased modestly by about 0.6 million barrels while Cushing, Ok crude oil inventories decreased by 0.3 million barrels on the week. PADD 2 crude oil stocks are still showing a surplus of 14.5 million barrels versus last year and 33.4 million barrels versus the five year average. The Cushing area surplus came in at 8.6 million barrels versus last year and 17 million barrels compared to the five year average.

There is still a lot of crude oil to be removed from the area before the Brent/WTI spread gets back to historically normal level of WTI trading at a premium over Brent. The decrease in crude oil inventories in Cushing was bullish for the Brent/WTI spread and has been the main reason the narrowing tend has resumed for the moment. The shutdown of the Pegasus pipeline is likely to weigh on the inventory situation in Cushing going forward and thus will impact the Brent/WTI spread. There was a large decrease in refinery utilization rates in PADD 2 for the second week in a row (decrease of 3.3 percent) suggesting that the return from the spring maintenance season may be slowing down and thus contributing to the crude oil inventory build in PADD 2 this week.

Distillate stocks declined by 2.3 million barrels versus an expectation for a smaller draw as refinery run rates increased by 0.6 percent. Heating oil/diesel stocks declined on a week over week basis as the eastern half of the US experienced winter like temperatures during the report period. The year over year deficit came in at 18.9 million barrels while the five year average deficit came in around 22.6 million barrels.

Gasoline inventories decreased within the range of market expectations. Total gasoline stocks decreased by about 0.6 million barrels on the week. The surplus versus last year came in around 3.1 million barrels while the surplus versus the five year average for the same week came in at about 1.6 million barrels. Gasoline stocks decreased in PADD 1 for the fourth week in a row. PADD 1 stocks (US East Coast) decreased by 1.1 million barrels this week with the surplus versus last year coming in around 0.9 million barrels with a 0.9 million barrel surplus compared to the five year average for the same week.

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 on the week for the complex. Overall this week's report was slightly bearish.

I am maintaining my view of the entire complex at neutral across the board but with a cautiously bearish bias as inventories are starting to build and jeopardizing the technical bottoms that have been put in place in the complex over the last several weeks. WTI has now breached its range support level as has Brent and refined products. The complex is now showing signs that the next move could be a continuation to the downside.

I am maintaining my view at neutral for Nat Gas as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. I do not expect prices to collapse but I view the moderating temperatures to result in the Nat Gas price rally likely topping out at this time as the lower demand shoulder season finally arrives.

This week the EIA will release its inventory on its normal schedule and time... Thursday April 4th at 10:30 AM. This week I am projecting an average withdrawal of 65 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest level of above normal Nat Gas heating related demand. My projection compares to last year's net injection of 42 BCF and the normal five year net injection for the same week of 4 BCF. Bottom line the inventory deficit will widen strongly this week versus last year while the surplus will turn to a small deficit compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be bullish when compared to the historical data.

If the actual EIA data is in line with my projections the year over year deficit will widen to about 707 BCF. The deficit versus the five year average for the same week will come in around 3 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are in a range of 65 BCF to about a 100 BCF net withdrawal with the Reuters market consensus at 91 BCF withdrawal. Markets are mixed ahead of the US trading session as shown in the following table.

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

View All Market Commentary

*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.

Copyright CME Group All rights reserved.