After three strong up days the spot WTI contract is on the defensive this morning ahead of today's EIA oil inventory report. WTI is now in a new higher technical trading range with $94.50 the support area and $97 the current resistance level. Last night's API inventory report showed a much larger than expected build in crude oil stocks in the US which is currently keeping a short term cap on prices until the more widely followed EIA report is issued later this morning.

On the other side of the equation the May Brent/WTI spread is in the midst of a mild short covering rally after the API report showed a build in crude oil stocks in both Cushing and PADD 2. As I have been discussing in the newsletter for the last few days the Brent/WTI spread is very oversold and susceptible to a round of short covering. So far the API crude oil builds in the mid-west are currently serving as a mild catalyst to short covering as market players await confirmation from the EIA report.

At the moment the $13/bbl support has held for the May Brent/WTI spread with the first level of resistance around the $14/bbl level. However, if the intensity of the short covering increase the next area of resistance will be around the $15.40/bbl if the first line of upside defense is breached. I view today's activity in the spread as still just short covering rally and not a change in the narrowing trend that has been in play since the spread began forming a top in February.

The externals have been a negative for oil prices with the euro falling to its lowest level since mid-November of 2012. Although there has been a deal put in place in Cyprus and the banks in Cyprus are scheduled to open tomorrow and the market is still uneasy about the type of deal that was done for Cyprus. The main concern is focused on whether or not the Cyprus type deal will be the new normal for future bailout deals (if needed) in the rest of the Eurozone. The declining euro is also weighing on European stocks today.

Further weighing on equities and the euro this morning is another round of bearish macroeconomic data out of Europe. In the UK business investment declined in Q4 while a 0.3 percent contraction of the economy was conformed for Q4. Eurozone March consumer confidence declined while consumer sentiment held steady. EU March business confidence also declined in March. Europe remains mired in a recession with no short term signs that the economy of this region is heading for a growth spurt anytime soon… although the EU leading economic indicators did rise in February.

Global equities are continuing to show a mixed performance picture for 2013 as shown in the EMI Global Equity Index table below. The EMI Index increased marginally over the last twenty four hours narrowing the year to date loss to 0.4 percent. On the week the Index has improved by 0.5 percent with gains in most of the bourses in the Index. Japan remains the high flyer of the year (so far) with a gain of 20.2 percent for 2013 while the US Dow is now showing a gain of 11.1 percent for the year as the US economy is showing signs that growth is slowly picking up unlike Europe. The strength of the US dollar over the last two months is a combination of a flight to quality caused by the evolving debt problems and slow growth of the European economy as well as a movement of cash to the US into US based risk asset markets.

Tuesday's API report was bearish for crude oil and mildly supportive for refined products. There was as surprisingly larger than expected build in crude oil stocks but offset by a larger than expected draw in gasoline and distillate fuel inventories. Total crude oil stocks increased by 3.7 million barrels versus an expectation for a smaller build. Gasoline showed a draw in inventory as did distillate fuel stocks. The API reported a 3.7 million barrel draw in crude oil stocks versus an industry expectation for a modest build of around 1 million barrels as crude oil imports increased strongly while refinery run rates also increased strongly by 1.8 percent. The API reported a modest draw in distillate and in gasoline stocks.

The API report was mixed. WTI and RBOB are lower while everything else in the oil complex is currently in positive territory for the session heading into the EIA oil inventory report tomorrow at 10:30 AM today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. The API reported PADD 2 stocks built by around 471,000 barrels while Cushing stock increased by 0.4 million barrels. On the week gasoline stocks decreased by about 2 million barrels while distillate fuel stocks decreased by about 1.9 million barrels.

My projections for this week's inventory report are summarized in the following table. I am expecting a modest build in crude oil inventories, a modest decline in distillate fuel... as the weather was winter like over the east coast... and a draw in gasoline stocks during the report period as refinery runs remain at below normal levels during the maintenance season.

I am expecting crude oil stocks to increase by about 1 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 27.3 million barrels while the overhang versus the five year average for the same week will come in around 40.9 million barrels. I am expecting a small build in crude oil stocks in Cushing, Ok and in PADD 2 even as the Seaway pipeline has been has been running at constrained levels for most of the report period. This will be mildly bullish for the Brent/WTI spread and could serve as a catalyst for a short covering rally in the spread as it is currently oversold. However, with the North Sea operating normally only a small build in Cushing stocks may not be enough for anything other than a shallow and short lived short covering rally.

With refinery runs expected to increase by 0.2 percent I am expecting a draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.0 million barrels which would result in the gasoline year over year deficit coming in around 1.6 million barrels while the surplus versus the five year average for the same week will narrow to around 0.4 million barrels.

Distillate fuel is projected to decrease by 1.2 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 17.3 million barrels below last year while the deficit versus the five year average will come in around 18.9 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 in directional sync with minimal differences compared to last year's changes. As such if the actual data is in line with the projections there will be only modest changes in the year over year inventory comparisons for crude oil.

I am maintaining my view of the entire complex at neutral as the oil complex still appears to be in the process of forming a short term technical bottom. However, WTI, HO and RBOB have all remained in a sideways trading pattern with refined products trading near the lower end of the trading range while Brent has now breached its range support level. The complex may still be in a bottoming pattern but it is now looking like the probability of another down leg is increasing based on the current assessment of the fundamentals, the way the external price drivers are trading as well as the technicals.

I am maintaining my view at cautiously bullish For Nat Gas as long as the spot contract remains above the $3.82 to $3.86/mmbtu technical support area that will need to hold to keep the current uptrend in play. If this level is breached with settlements below this area there could be a modest retracement in prices. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern and currently those forecasts have continued to be supportive for heating related Nat Gas demand even though spring has arrived. 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.

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