Oil prices are starting the day modestly higher after a downward move for most of the complex on Monday... except WTI. The main feature of the complex on Monday was the modest round of profit taking selling of the March Brent/WTI spread which narrowed around $2/bbl but is holding the support level of about $21/bbl. The spread is still well above the levels it was at just prior to the announcement of the bottleneck on the Seaway pipeline. The spread is still in a short term uptrend and yesterday's sell-off in the spread can still only be categorized as a downside correction as technical support has held (for now) and the fundamentals remain bullish for the spread. If the $21/bbl level is breached the next support level is around the $19.50/bbl level.

On the global economic finance ministers and central bank governors from the Group of Seven industrial nations issued a joint statement Tuesday pledging that members won't target exchange rates. The G-7 said it reaffirmed a "longstanding commitment to market-determined exchange rates and to consult closely in regard to actions in foreign-exchange markets." The G-7 said members agree "that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability". They said members would continue to "consult closely" on exchange markets and cooperate "as appropriate." The G-7 consists of the U.S., Japan, Germany, the U.K., France, Italy and Canada. As I discussed in yesterday's newsletter there has been growing concern in the market over underperforming nations possibly using their currency to bolster their export business. At least for the moment the joint statement should calm those fears.

Global equities inched higher over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index gained 0.1% with only the US and Canada losing ground yesterday. Activity in Asia is still well below normal due to the Lunar New Year holiday (China is closed all week). The year to date gain widened slightly to 0.8% with Brazil still the only bourse in negative territory for the year. In spite of the G-7 statement Japan's bourse remains on top of the list as a weaker Yen has been a positive for this export driven economy. Another nuclear test by North Korea overnight did little to impact global equity or just about any risk asset markets.

OPEC just released their February Monthly Oil Report (the EIA report is out this afternoon and the IEA report tomorrow morning). As most in the market were expecting OPEC did increase their projection for global oil demand growth but by only 80,000 bpd versus last month's report. The increase is based on a view of an improved economic recovery. Overall I would say the OPEC report is constructive and mildly bullish based on the demand forecast. Following are the main highlights of the report.

The OPEC Reference Basket rose by 2.5% in January to settle at $109.28/b. All Basket components improved with Venezuelan Merey showing the most significant increase. ICE Brent and Nymex WTI also moved higher in January. The WTI front-month improved by 7.5% to average $94.83/b and ICE Brent ended the month at $112.32/b. The agreement in the US averting the fiscal cliff triggered a rally in crude prices, along with improving confidence in the global economy. The increasing optimism about the economic outlook has also stimulated a large wave of speculative buying in the oil futures market. The return of the expanded 400-tb/d Seaway pipeline, open arbitrage to Asia, and production glitches in the North Sea market have also underpinned Nymex WTI and ICE Brent prices.

World economic growth remains unchanged at 3.0% for 2012 and 3.2% for 2013. The weak fourth quarter in the US caused growth to be revised lower to 2.2% in 2012 and 1.8% in 2013. Growth in Japan remains unchanged at 0.7% this year, after an estimated expansion of 2.0% in 2012. The Euro-zone is still forecast to recover to 0.1% from a decline of 0.4% in 2012. China continues to benefit from increasing global trade and is forecast to expand at 8.1% in 2013 and 7.8% in 2012, up 0.1 and 0.2 percentage points, respectively. India's growth in 2013 has been revised to 6.1% from 6.4%, following growth of 5.5% in 2012. While a tentative recovery in the global economy is visible, a number of fiscal-related issues in the developed countries remain and are likely to impact growth in the coming months.

World oil demand growth in 2012 was revised up by 45 tb/d to stand at 0.8 mb/d, reflecting higher than-expected actual data for the fourth quarter. Given some signs of recovery in the global economy and colder weather at the start of this year, the forecast for world oil demand growth in 2013 has also been revised up by 80 tb/d to stand at 0.8 mb/d. The bulk of the growth is seen coming from China, which is forecast to increase by 0.4 mb/d. Other non-OECD countries will add further 0.7 mb/d, while OECD demand is expected to still see a contraction of 0.3 mb/d, although 0.1 mb/d less than estimated in 2012.

Non-OPEC supply is estimated to have increased by 0.5 mb/d in 2012, unchanged from the previous month. In 2013, non-OPEC oil supply is forecast to increase by 0.9 mb/d, unchanged from the previous month. The US, Canada, the Sudans, Brazil, Australia, and Kazakhstan are seen as the major contributors to supply growth in 2013. OPEC NGLs are expected to increase by 0.2 mb/d in 2013, following an estimated increase of 0.4 mb/d in 2012. In January, total OPEC crude oil production averaged 30.32 mb/d, according to secondary sources, representing a decrease of about 20 tb/d from the previous month.

Product markets in January reversed the declining trend seen since October. The gasoline market became temporarily bullish on the back of tightening sentiment with inventories falling in the Atlantic Basin amid healthy cracks in the bottom of the barrel. Additionally, refinery margins in Asia continue to recover, supported by rising seasonal demand in middle distillates and fuel oil for utilities, as well as expectations of tightening product supplies in the region.

The tanker market in January saw a generally lower trend, with both clean and dirty spot freight rates declining partially due to increased new Worldscale flat rates on higher bunker prices. Ample tonnage supply amid lower tonnage demand pressured freight rates. On average, VLCC rates decreased 18%, Suezmax dropped 5%, and Aframax declined 6%. OPEC sailings and fixtures declined in January by 3% and 6.6%, respectively.

Preliminary data for December shows that total OECD commercial oil stocks fell seasonally by 44.1 mb, but remained in line with the five-year average. Commercial crude stocks showed a surplus of 47 mb, while products indicated a deficit of almost the same amount. In terms of forward cover, OECD commercial stocks stood at around 57.2 days at the end of December, one-and-a-half days higher than the five-year average. US total commercial oil stocks rose 13.8 mb in January , showing a surplus of 54.0 mb with the five-year average. The build in total US commercial oil stocks was attributed to both crude and products, which rose by 11.7 mb and 2.1 mb, respectively.

Demand for OPEC crude in 2012 remained unchanged from the previous assessment to stand at 30.1 mb/d, representing a decline of 0.1 mb/d from the previous year. Required OPEC crude for this year is forecast to average 29.8 mb/d, indicating a decline of 0.3 mb/d and representing an upward adjustment of 0.1 mb/d from the previous report.

The weekly oil inventory cycle will follow its normal schedule this week. The weekly oil inventory cycle will begin with the release of the API inventory report on Tuesday afternoon and with the more widely followed EIA oil inventory report being released Wednesday morning at 10:30 AM EST. With geopolitics still less of an issue or price driver than it was the last month or so the main oil price drivers are likely to be any and all macroeconomic data on the global economy with oil fundamentals equally important. This week's oil inventory report could be a modest price catalyst especially if the actual outcome is outside of the range of industry projections.

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 2.5 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 35.1 million barrels while the overhang versus the five year average for the same week will come in around 39.9 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 0.3 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 3.7 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 15.1 million barrels below last year while the deficit versus the five year average will come in around 16.6 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 at neutral bias to cautiously bullish for Brent and the rest of the complex. 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 Brent contract is approaching a key technical resistance level of about $118/bbl and could have trouble breaching it in the short term.

I am keeping my Nat Gas view and bias at neutral as the weather forecasts and nearby temperatures remain somewhat 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 supportive at the moment.

Markets are mostly higher heading in the US trading session as shown in the following table.

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


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