A combination of a bullish inventory report (see below for more details) coupled with a short covering rally in most risk asset markets was enough to send oil prices higher putting WTI solidly in the trading range of $102 to $107/bbl that I have been forecasting for the last several weeks. With the Iran/West meetings on Iran's nuclear program scheduled to begin tomorrow I do not expect any major movements in the oil complex until there is more clarity as to the outcome. For the next several days I expect the oil complex to move intraday basis the direction of the US dollar and equity markets with any major moves taking a back seat until it is clear as to whether or not Iran has changed its view and will move more in sync with the demands of the West.

Yesterday on Iranian TV it was reported that Iran was planning on presenting a plan that would resolve all of the issues with the West's concern that Iran is working its way toward making nuclear weapons. No further details were released so the outcome is still very much in the air. The West will certainly want a clear indication that Iran only maintain its capabilities to use nuclear fuel for power generation and medical research. I suspect that the meeting will end with some sort of a positive spin as the West does not really want to get involved in any military actions at this point in time and as such I would expect the communiqué from the meeting to indicate that progress was made and further meetings will be scheduled. As long as the potential for diplomacy exists the likelihood of military action is low.

Certainly Israel remains a wild card and how they interpret the outcome may be different then how the west views the results. However, I do not think Israel is ready to go it alone versus Iran and thus as long as there is a modicum of progress Israel will remain in the background for the short term.

I would not short the oil market heading into the weekend unless something clear cut was announced on Friday. That said I do think that if there is some progress the risk premium in the price of oil will recede modestly over the coming weeks. Heading into the meetings I remain on the sidelines as there will plenty of opportunity to react to the outcome next week when more clarity emerges.

As I mentioned above in the short term and on an intraday basis the oil complex will likely follow the lead of the US dollar and equity markets both of which have been in directional adjustments over the last twenty four hours. The US dollar has been slowly receding while global equities have been slowly recovering some of the losses they experienced over the last several weeks. Oil prices were supported by yesterday's move in risk assets. As shown in the following table the EMI Global Equity Index had mixed results over the last twenty four hours with seven of the ten bourses in the Index adding value. The Index is still lower by 2.6% for the week with the year to date gain coming in around 7.4% or less than half of the gain the global market had in place back in the middle of March.
The upside correction in equities has been mild at best so far. Canada moved back into a small positive gain for the year mostly on the back of the strong rise in oil prices yesterday as Canada is a very commodity driven economy. The main reason equity markets have been under pressure is a growing view that the global economy is slowing and the potential for further European sovereign debt issues is increasing. Neither of those have changed so for the moment we have to call the gains in equities over the last twenty four hours as still just a short covering rally.

The IEA released their latest Oil Market Report and indicated that oil is more comfortably supplied since 2009 on a combination of slowing oil demand growth and OPEC output. The April OMR detects a turning of the tide for market fundamentals, with an implied 1Q12 global stock build of 1.2 mb/d. Gains in OPEC production to 31.4 mb/d in March have seen global oil supply move ahead of oil demand for the first time since early 2009. However, despite a recent easing, oil prices remain high, reflected in a now-higher price assumption for 2012 overall. Uncertainty over summer supplies, and the potential loss of around 1 mb/d of Iranian crude due to sanctions, continue to provide price support. A higher baseline 1Q12 demand estimate nonetheless holds expected 2012 oil demand growth unchanged at 0.8 mb/d. Unplanned stoppages curbed 1Q12 non-OPEC supply by around 1.1 mb/d, but gradual recovery is expected for the rest of the year, resulting in y-o-y growth of 0.7 mb/d. OECD industry stocks built by 550 kb/d in 1Q12 and stand at a preliminary 2 653 mb at end-March. 2Q12 refinery runs are likely to hit a seasonal low of 74.4 mb/d, although rising US throughputs and new non-OECD refining capacity cushion the drop. The main highlights from the report follow.

Crude futures regained early-2011 highs in March, underpinned by concern over current and potential supply disruptions. However, amid rising actual 1Q12 OPEC production, and a sizeable implied build in global stocks, prices have subsequently eased. Brent futures were last trading near $120/bbl, with WTI at $102/bbl.

Global oil demand is expected to rise to 89.9 mb/d in 2012, a gain of 0.8 mb/d (0.9%) on 2011, largely unchanged from last month. Consumption reaches a 2Q12 low of 88.6 mb/d, as weak seasonal products demand combines with high prices and a stuttering economic recovery. Demand then strengthens through end-2012 as economic growth accelerates.

Non-OPEC supply fell by 0.5 mb/d in March to 52.7 mb/d. Decline was widespread, but notable in the UK and at synthetic crude plants in Canada. Unplanned outages reached 1.1 mb/d in 1Q12, restraining non-OPEC output to 53.2 mb/d, albeit 0.5 mb/d higher than 1Q11. Non-OPEC growth recovers through 2012 to average 0.7 mb/d, taking total output to 53.4 mb/d.
March OPEC supply held near three-and-a-half year highs, up by 135 kb/d to 31.43 mb/d. A list of countries pledging import cuts in coming months suggests Iranian supplies could fall by 0.8-1.0 mb/d versus 2011 levels by mid-summer. The 'call on OPEC crude and stock change' for 2012 remains at 30.1 mb/d, but is raised for 2Q12 and 3Q12 to 29.5 mb/d and 30.7 mb/d respectively.

Global refinery crude runs for 1Q12 have been revised down by 90 kb/d, to 74.8 mb/d. Seasonal maintenance, notably in OECD Pacific, trims global throughputs by 410 kb/d in 2Q12, to 74.4 mb/d. Seasonally higher US runs, and new non-OECD capacity, provide an offset, leaving 2Q12 runs 0.5 mb/d above year-ago, compared to a y-o-y gain of 120 kb/d in 1Q12.

OECD industry total oil inventories fell by 12.4 mb in February, to 2 630 mb, compared with a historical average 38.8 mb draw. The stock deficit vs. the five-year average narrowed to 13.9 mb, from 40.4 mb in January. Forward demand cover rose 1.2 days to 59.6 days. March preliminary data show a 22.6 mb increase in OECD industry inventories.

Wednesday's EIA inventory report was mixed to bullish as it showed a modest decline in total stocks, a larger than expected build in crude oil stocks mostly due to a large decrease in refinery run rates. In addition the report showed a surprisingly large and unexpected draw in distillate fuel inventories while gasoline stocks declined much more than the expectations. Implied demand surged higher mostly driven by the distillate side of the equation. Refinery utilization rates decreased on the week to 83.8% of capacity a decrease of 1.9% 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 decreased modestly on the week by 3.9 million barrels after increasing strongly the previous week. The year over year surplus still widened to 32.5 million barrels while the surplus versus the five year average for the same week decreased to 52 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. 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 (by 2.8 million barrels) versus an expectations 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 5.9 million barrels while the surplus versus the five year average for the same week came in around 21.5 million barrels. PADD 2 crude oil inventories decreased by about 0.2 million barrels while Cushing, Ok crude oil inventories also increased by about 0.3 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 small changed in inventories this week is mostly a neutral for the Brent/WTI spread. The spread has been in a downside correction for the last week or so as the realities of the Seaview pipeline are beginning to work through the market sentiment.

Distillate stocks decreased strongly versus an expectation for a small seasonal build. Heating oil/diesel stocks decreased by just 4 million barrels. The combination of a robust export markets and an early start to the planting season pushed distillate implied demand higher on the week. The year over year deficit came in around 18.9 million barrels while the five year average moved back to a small deficit to about 0.2 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 4.3 million barrels on the week versus an expectation for a draw of about 1.0 million barrels. The surplus versus last year came in at 7.9 million barrels while the deficit versus the five year average for the same week was about 17.1 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 bullish on the week as total inventories declined on the week.
I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $107/bbl. Geopolitics will remain the main price driver leading up the Iran/West meetings on April 13/14th but until I get more clarity as to how the meeting is likely to turn out I am more comfortable staying on the sidelines today.
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.

The most interesting outcome in the Nat Gas market on Wednesday was the spot futures price finally broke the $2/mmbtu level as predicted and is now trading with a $1 handle. The next support level is around the $1.95/mmbtu level. Nat Gas remains in a long term downtrend and nothing has changed to suggest this trend is on the cusp of changing. In my view the only action that will make the trend change quickly is a significant cut in production.

Currently markets are mixed as shown in the table below.

Best regards,
Dominick A. Chirichella
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