Oil prices are in a bit of a holding pattern as the market bulls look toward the evolving geopolitical situation in the Middle East while the bears focus on the risk of oil consumption slowing as the global economy seems to be contracting. Overall the bulls or those still expecting some sort of supply interruption are winning the battle and having the most influence on the price of oil. As I have said repeatedly in the newsletter there is currently no shortage or interruption in the supply of oil related to Iran. As such the risk premium that has been added to the crude oil price is strictly based on the potential or perception for a supply interruption. At the moment Brent is now trading at a nine month high. At the moment Iran continues to play hardball as the war of words and rhetoric continues. As long as this continues the price of oil will stay well bid with minimal downside risk until it is clear that real progress is being made..which does not look likely in the very short term.

The risk asset markets...including oil are getting a bit of support after a better than expected business forecast out of Germany this morning. With Greece in the background (at least for the time being) the market has been placing more emphasis on anything that is bullish coming out of Europe. On the other hand the EU is projecting that the 17 nation euro zone economy will shrink 0.3% in 2012 which is a downgrade compared to their November forecast. The combination of a slowing economy in Europe and the growing risk of inflation (due to high oil prices in particular) could drive Europe into an even deeper contraction than what is currently being forecast by the EU.

With Europe slowing and the US just marginally better the vast majority of oil demand growth is going to come from the emerging market world with China in the lead. At the moment China also looks like its economy is slowing a bit faster than the government has been anticipating while inflation risk seems to also be emerging again. China did reduce their bank reserve requirement ratio by 50 basis points this week in response to an anticipated liquidity crunch. As it looks at the moment it is going to take a much more aggressive accommodative monetary policy to turn the Chinese economy back into the world's main economic growth engine. I do not expect that to occur until it is clear that inflation is under control. With oil prices still surging inflation is not likely to subside in the very short term. Bottom line oil demand is not likely to be an upside price driver for the foreseeable future.

Global equity markets are still higher on the week as shown in the EMI Global Equity Index table below. The Index has increased by 0.4% for the week (so far) widening the year to date gain to 13.1%. The global equity markets have been very resilient in spite of the signs that the global economy is slowing and inflation risk is rising. Equity markets remain overbought especially with the aforementioned backdrop of slow growth and inflation risk. For the moment the bulls remain solidly in control of the global equity markets as more and more sidelined cash continues to work its way into risk asset markets. The API report showed a larger than expected build in crude oil stocks along with surprise builds in both gasoline and distillate fuel inventories (versus a forecast for a decline in stocks). The API reported a large build (of about 3.6 million barrels) in crude oil stocks versus an expectation for a modest draw in crude oil inventories as crude oil imports increased while refinery run rates increased by 2.9%. The API reported a small build in gasoline stocks and a surprisingly large build in distillate stocks versus an expectation for a seasonal draw in inventories.

The report is bearish across the board. That said the changes overnight are not from the API inventory report as prices are higher across the board and are being driven by the movement of the macro indicators and the evolving geopolitics of the Mideast region. The market remains tied to the evolving situation in Europe that has been unfolding along with the geopolitics of the mid-east this week as discussed above with inventory data a secondary driver. The API reported a build of about 3.6 million barrels of crude oil with a draw of 0.3 million barrel build in Cushing and a build of about 0.8 million barrels in PADD 2 which is neutral for the Brent/WTI spread. On the week gasoline stocks built by about 0.3 million barrels while distillate fuel stocks increased by about 0.6 million barrels. The EIA data will hit the media airwaves at 11:00 AM EST today. Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today. At the moment oil prices are still being mostly driven by the tensions evolving in the Middle East between Iran and the West (as discussed above) and to a much lesser extent based on the direction of the euro and the US dollar. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data suggesting that this week's oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the new snippets out of the Middle East and the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. As such this week's oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report.

My projections for this week's inventory reports are summarized in the following table. I am expecting an across the board draw in inventories this week with a modest decline in crude oil and gasoline stocks, a seasonal decline in distillate stocks along with a small decrease in refinery utilization rates. I am expecting a small draw in gasoline inventories and a seasonal draw in distillate fuel stocks as winter like weather did arrive for part of the report period in some parts of the US...in particular the east coast. I am expecting crude oil stocks to decrease by about 1.5 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 9.2 million barrels while the overhang versus the five year average for the same week will narrow to around 3.9 million barrels.

With refinery runs expected to decrease by 0.2% I am still expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 0.9 million barrels which would result in the gasoline year over year deficit coming in around 7 million barrels while the surplus versus the five year average for the same week will come in around 3.8 million barrels.

Distillate fuel is projected to decrease by 1.5 million barrels on a combination of an increase in exports and a bit of winter like weather last week. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 17.7 million barrels below last year while the surplus versus the five year average will come in around 1.2 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 for the same week was mostly in the same direction as the projections except for crude oil. As such if the actual data in line with the projections there will not be a major change in the year over year comparisons for most everything in the complex except for crude oil inventories. WTI is now trading above its most recent resistance level of $104/bbl (now a support level with $110/bbl the next level of resistance. Brent has also breached its resistance level of $120/bbl yesterday. But as with WTI... Brent is also settling into a new short term trading range of around $119/bbl to $126/bbl. Oil continues to be driven by the evolving geopolitics of the Mideast...in particular Iran with just about all of the other normal prices drivers taking a secondary role...including fundamentals. I am keeping my view at cautiously bullish and keeping the caution flag flying to remind all that the market is still susceptible to a modest round of profit taking selling in the short term. I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally.

Nat Gas futures have been trading in a relatively tight trading range but for the first time this week it actually broke above the trading range that the April Nat Gas contract was trading in all week. I am still expecting a modest pop after the data is released today (maybe before in anticipation) but it does not change my overall bearish view. The weather is getting milder and spring is right around the corner and even with a modestly strong withdrawal from inventory today the surplus versus both last year and the five year average is still going to be close to 800 BCF and on a path to set an all time record high level at the end of the winter heating season.

Currently markets are mostly higher as shown in the following table.

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