All it takes is no speeches or 30 second news snippets coming from Europe and the risk asset markets were able to put together a strong short covering rally that has carried over into this morning's trading so far. The main news out of Europe this morning is the size of the loans made by the ECB to the regions banks on a three year basis. The roughly $650 billion dollars was about twice as much as many had expected and a positive as it should help in keeping credit flowing during the sovereign debt debacle. In addition German bond yields declined today another positive sign. With the holiday period quickly approaching Europe seems to be moving into the background at least on a temporary basis. With the macroeconomic data out of the US continuing to outperform and as long as nothing new emerges out of Europe the current short covering rally could continue. That said we are quickly approaching the low liquidity holiday trading period as more and more trading and investing shops close down for the rest of the year.

The global equity markets recovered most of the losses from earlier in the week and then some as shown in the EMI Global Equity Index table below. The EMI Index is now up 1.1% on the week narrowing the year to date loss to 15.4%. The US Dow is now up by 4.5% for the year and continues to hold the top spot in the Index. Only Hong Kong and China remain in bear market territory. Yesterday (and into this morning so far) is still categorized as a short covering rally and not a change in trend at this point in time. Overall the global equity markets were supportive for oil prices as well as the broader commodity complex.
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The API data showed across the board draws. The API reported a large draw in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 4.6 million barrels as crude oil imports decreased and refinery run rates also decreased by 2.1%. The API reported basically small draw in gasoline stocks versus projections for a modest build and a larger than expected draw in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline with a small draw in distillate fuel inventories this week. The report is somewhat bullish for the entire complex. That said it is difficult to differentiate whether the gains overnight were from the inventory report (I doubt it) or from the falling USD and positives out of Europe (most likely). The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver. The API reported a draw of about 4.6 million barrels of crude oil with a 1.1 million barrel draw in Cushing but a build of about 1.7 million barrels in PADD 2 which is neutral for the Brent/WTI spread which has been somewhat range bound since the middle of November. On the week gasoline stocks declined by about 0.4 million barrels while distillate fuel stocks declined by about 2.8 million barrels. The more widely watched EIA data will be released this morning. 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. Finally keep in mind that the large variations from the expectations are likely related to the industry starting to adjust their inventories for LIFO accounting purposes.
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Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe completely moves into the background. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe and the US are still in the midst of uncertainty 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 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 mixed inventory data with a small increase in refinery utilization rates which should result in a neutral weekly fundamental snapshot. I am expecting a modest draw in crude oil stocks with an increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and only a small draw in distillate fuel stocks as winter like weather has still not arrived in most parts of the US...especially the large HO market along the north east. I am expecting crude oil stocks to decrease by about 1.7 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will narrow to about 8.2 million barrels while the overhang versus the five year average for the same week will come in around 10.4 million barrels.

With refinery runs expected to increase by 0.2% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by about 1.0 million barrels which would result in a gasoline year over year surplus of around 2.6 million barrels while the surplus versus the five year average for the same week will come in around 10.3 million barrels.

Distillate fuel is projected to decrease by only 0.1 million barrels on a combination an increase in production and lower than normal heating oil consumption. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year the deficit will likely now be about 19.3 million barrels below last year while the deficit versus the five year average will come in around 2.0 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 experienced pretty much the same directional moves as the projections for this week's inventory report but with a significant draw in crude oil stocks. Thus based on my projections the comparison to last year will result in a minimal year over year change in refined product inventories only.
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With WTI is still trading above the key technical support level of the mid- $94's/bbl the market seems to be holding support (for the moment). As such I am upgrading my view back to neutral to see if eh current short covering rally continues.
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I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.

Big news yesterday...Nat Gas futures did not make another new year to date low. That said it certainly has not moved out of its existing downtrend either. The short term weather forecast remains bearish and is projecting warmer than normal temperatures across most of the US through the end of the year. This will result in total Nat Gas in inventory at the end of this year at well above both last year and the more normal five year average. The weather is going to have to get very cold for the second half of the winter for inventories to destock strongly and for prices to move higher from the current very low levels for this time of the year.

There is somewhat of a bright spot for the bulls as the most recent forecast from private weather forecaster WSI is projecting heating fuels demand aggregated across the US to be about 4.3% above the 30 year normal period but about 5.4% below last winter. Although the forecast is mildly bullish I am not sure it will result in a major price spike anytime soon. Following are the details of WSI's forecast.

WSI (Weather Services International) expects the upcoming period (January-March) to average colder than normal across most of the northern and western US, with above-normal temperatures confined to the south-central and southeastern states. The WSI seasonal outlooks now reference a standard 30-year normal (1981-2010).

Currently as a new day of trading gets underway in the US markets are higher.

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Note:
The Friday morning, Dec 23 edition of the Energy Market Analysis will be the last issue for 2011. I will resume a normal publishing schedule beginning on Tuesday January 3, 2011.

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