This week started as another risk off trading week with oil and most commodity and risk asset markets losing ground on Monday. The fading geopolitical risk in the Middle East, slowing of the global economy and the uncertainty surrounding Greece insofar as whether or not they will remain in the euro zone have all weighed heavily on the market for the last several weeks. Today the news out of Europe was mixed. Greece politicians are still meeting with the President in an attempt to form a new coalition government which would avoid another election in early June and possibly an early exit from the euro zone. Either way everything going on in Greece is a negative for all of the markets and will remain a negative until more clarity emerges as to the short and medium term future for Greece.

On the other hand the latest GDP out of the EU show the economy steadied in the first quarter with a strong rebound in Germany offsetting contractions in Italy and Spain. With an unchanged GDP for the first quarter the EU has avoided being tagged as a region in an official recession after the 4th quarter of last year showed a contraction of 0.3% in the EU. So for now the EU has avoided the technical definition of a recession (two consecutive quarters of contraction). That said it may not be called an official recession but the economy in the region is sure functioning very much as an economy in recession. In addition the fact that the growth gap between Germany and the southern EU states continue to widen which is certain to play into the upcoming talks between German and the newly elected Socialist President of France insofar as austerity versus spending.

For the moment the market is trading in a bit of a relief rally after the latest GDP data out of Europe and after the market hitting some key technical support areas for some risk asset markets in Asian trading hours. That said it still can only be categorized as a short covering rally and not yet a turn from the downtrend most risk asset market have been in for the last several weeks. The official government speak out of Europe ahead of the Merkel Hollande meeting is that both Germany and France will agree to a common approach to combating the euro zone debt crisis by the end of next month as reported in Reuters this morning. Once again the strategy of kicking the can down the road seems to be in play. For the short term the situation with Greece will continue to be the number one issue that will impact risk asset markets with a German French approach for going forward with the EU economy playing a secondary role especially since it has be pushed down for a few months.

The selloff has broadly hit most global equity markets as shown in the EMI Global Equity Index table below. The Index has already lost 2.1% for the week resulting in the year to data gain narrowing to 2.7% or the lowest level since the first week of January. Three of the ten bourses in the Index are in negative territory for the year...Canada, London and Paris. There are no bourses showing double digit gains with Germany still showing the highest gain for the year as it stands out as about the only star in a region (euro zone) that is on the cusp of another official recession (see above). Global equity markets are a leading indicator for the global economy and the way the equity markets have been trading over the last several weeks suggest that the global economy is likely to grow at only a very slow pace at best with pockets of some countries already back into contraction. Global equity markets are a bearish driver for oil and the broader commodity complex.
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This week's oil inventory reports will be released on their normal schedule. The API data will be released on Tuesday afternoon while the EIA data will hit the media airwaves at 10:30 AM EST on Wednesday. At the moment oil prices are still being mostly driven by the direction of the euro and the US dollar as well as by a view that the global economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West have been easing as another meeting is scheduled for May.
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As such we expect more market participants to pay attention to this week's round of oil inventory data suggesting that this week's oil inventory reports could also start to impact price direction. This week's oil inventory report could move to being a primary price driver especially 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 build in inventories this week with a modest build in crude oil, a small build in gasoline inventories and a modest build in distillate fuel stocks along with a small increase in refinery utilization rates. I am expecting a build in gasoline inventories and a build in distillate fuel stocks as the summer planting season is winding down (decreasing the demand for diesel fuel) while the heating oil demand is dissipating. I am expecting crude oil stocks to increase by about 1.2 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil will come in around 10.4 million barrels while the overhang versus the five year average for the same week will widen to around 26.4 million barrels.

With refinery runs expected to increase by 0.3% I am expecting a small build in gasoline stocks. Gasoline stocks are expected to increase by about 0.2 million barrels which would result in the gasoline year over year surplus coming in around 1.4 million barrels while the deficit versus the five year average for the same week will come in around 27.4 million barrels.

Distillate fuel is projected to increase by 0.4 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 22 million barrels below last year while the deficit versus the five year average will come in around 13 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 inventories were mixed. As such if the actual data is in line with the projections there will be a modest change in the year over year comparisons for most of the complex.
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I am keeping my view to cautiously bearish after oil broke down on all fronts last week with a continuation to the downside to open trading for the week. Oil is now solidly below the trading range it has been in for the last month or so and well below several key support areas. WTI is now solidly trading in double digits with Brent currently holding up a tad better.
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I am keeping my view at neutral and keeping my bias also at neutral with an eye toward the upside. The surplus is still building in inventory versus both last year and the five year average and could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.

Currently markets are mixed as shown in the following table.

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

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