With geopolitics relatively quiet on Wednesday another significant build in US crude oil stocks sent oil prices significantly lower on the day. The carryover from the FOMC minutes suggesting that there will likely not be another QE3 also impacted oil from the negative side as well as most all risk asset markets. At the moment most of the risk asset price drivers are pointing lower. However, WTI was able to move back into the trading range I have been expecting of $102 to $107/bbl even though it dipped below this level on an intraday basis. I think the oil complex is forming a short term bottom at the lower end of the trading range ahead of tomorrow's US nonfarm payroll data as well as the April 13/14 Iran/West nuclear negotiations.

This is going to be an interesting day as most markets...including the oil complex will be closed for the Good Friday Holiday. We could see a bit of short covering today as many traders may not want to head into the employment data from the short side nor be exposed to the evolving geopolitical issues of the Middle East over the long holiday weekend when they are not able to protect their positions in the event of a unpredictable bullish event. Liquidity should begin to wind down early in the session as many participants head to the sidelines for the long weekend.

The global equity markets continued in their downside correction after the bearish FOMC minutes from Tuesday afternoon. As shown in the EMI Global Equity Index table below the composite Index lost another 0.9% over the last twenty four hours. The Index is now lower by 1.5% on the week resulting in the year to date gain narrowing to 10% or 5.2% off of its peak level hit in mid-March. The Index is now back to where it was in early February. For the moment global equity markets remain a negative or bearish price driver for the oil complex.
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Wednesday's EIA inventory report was mixed to bearish as it showed another very large build in total stocks, a surprisingly large build in crude oil stocks mostly due to another significant increase in crude oil imports that could still be some make-up from the weather closure of the Houston Ship Channel two weeks ago. In addition the report showed a smaller than expected build in distillate fuel inventories while gasoline stocks declined within the expectations. Implied demand was about unchanged but the pattern has been downward in the US over the last four or five years. Refinery utilization rates increased on the week to 85.7% of capacity an increase of 1.2% 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
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Total commercial stocks of crude oil and refined products increased strongly on the week by 12.4 million barrels after increasing the previous week. The year over year surplus widened to 31.5 million barrels while the surplus versus the five year average for the same week increased to 54.9 million barrels. By all measurements total oil supply in the US is balanced to comfortable irrespective of the evolving geopolitical risk at the moment. It also strongly suggests that there is no need to waste taking oil out of the Strategic Petroleum Reserve as it is definitely not needed. Any release of oil from the SPR would be nothing other than a political move in an election year and thus my categorization as the oil for votes program. Hopefully the Administration will use better judgment and retain the oil in the event of a real shortage.

Crude oil inventories increased strongly (by 9 million barrels) versus an expectations for a modest build. With an increase in stocks this week the crude oil inventory status versus last year is now showing a surplus of around 4.7 million barrels while the surplus versus the five year average for the same week came in around 17.5 million barrels. PADD 2 crude oil inventories increased by about 1.5 million barrels while Cushing, Ok crude oil inventories also increased by about 0.7 million barrels on the week.

Crude oil inventories in the mid-west region of the US have been in a decline and are still at levels not seen since 2010 when the Brent/WTI spread was trading at significantly lower levels. However, the large gains in inventories this week is mostly bullish for the Brent/WTI spread. The spread still remains in a technical uptrend.

Distillate stocks increased marginally versus an expectation for a large seasonal build. Heating oil/diesel stocks increased by just 19,000 barrels. The year over year deficit came in around 17.5 million barrels while the five year average surplus narrowed to about 3 million barrels.

Gasoline inventories declined within the expectations as a result of a rise in implied demand. Total gasoline stocks decreased by about 1.5 million barrels on the week versus an expectation for a draw of about 1.4 million barrels. The surplus versus last year came in at 5.2 million barrels while the deficit versus the five year average for the same week was about 12.8 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 total inventories built strongly on the week.
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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.

Not much new in the bearish world of Nat Gas as the market traded in a very tight and uneventful trading range today. The only new item in this market was somewhat bearish as the latest Colorado State University hurricane forecasters are projecting a below normal hurricane season. They anticipate that the 2012 Atlantic basin hurricane season will have reduced activity compared with the 1981-2010 climatology. The tropical Atlantic has anomalously cooled over the past several months, and it appears that the chances of an El Niño event this summer and fall are relatively high. We anticipate a below-average probability for major hurricanes making landfall along the United States coastline and in the Caribbean. However, coastal residents are reminded that it only takes one hurricane making landfall to make it an active season for them, and they need to prepare the same for every season, regardless of how much activity is predicted. Following is a summary of the forecast & probabilities.

Currently markets are mixed 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.