Oil prices were mixed over the last twenty four hours as the latest from the FOMC meeting kept interest rates at near zero levels and will do so likely to 2014...nothing new. In addition Chairman Bernanke indicted that the economy is growing and moderately upgraded its view of the US economy. He said the economy will remain moderate over the coming quarters and then it will pick up gradually. It sounds like another round of quantitative easing may finally be off the table. Without further easing the risk of inflation should decrease as oil and other commodity prices should not continue their march higher simply based on added liquidity into the US system and a resultant fall in the US dollar. Overall I viewed the outcome of the meeting along with Bernanke's remarks as neutral to biased to the bearish side for oil and other commodities as even a slowly growing US economy is not going to result in a surge in US oil consumption which has been in decline since 2007.

On the geopolitical front the tensions may be easing even further as Russia proposed a halt to the expansion of Iran's nuclear program to avert the new EU embargo sanctions on July 1st. The Iranians are studying the Russian proposal that would still give Iran the right to maintain its nuclear energy program for power generation and medical research. Whether or not this is a positive move or not the most important move will be determined when the next round of negotiations take place at the May 23rd meeting. The most positive off take I see so far is both sides are still talking and the talk is not rhetoric it is ideas and ways directed to make the West comfortable that Iran is not embarking in the direction of making a nuclear weapon. Diplomacy is still in the forefront with the May 23rd meeting critical in the process. This meeting the West is going to have to walk away with something real and concrete for the West and Israel to be convinced that real progress is being made and the meetings are not simply a stalling tactic on Iran's part.

As long as positive comments emerge in the media and until the May 23rd meeting at least I do not expect the oil risk premium to widen and in fact I would expect it to continue to narrow. With diplomacy still on the table it is highly unlikely that Israel will do anything alone at the moment. As long as the threat of military action continues to slowly receded the risk of a supply disruption will certainly recede and thus the geopolitical risk premium in the price of oil. The premium has been declining over the last several weeks and I do expect this trend to continue.

The macroeconomic data continues to suggest the global economy is still stuck in a slow growth pattern at best. Yesterday's durable goods orders in the US declined more than expected while mortgage applications contracted yet again. The data seems to be consistent with Bernanke's remarks that the US economy will only remain moderate for now. Global equity markets were moderate over the last twenty four hours with a mixed outcome as shown in the EMI Global Equity Index table below. The Index was about unchanged since yesterday resulting in the weekly outcome still negative by about 0.8% so far. The year to date gains have narrowed to 8.6% however all ten bourses are now back in positive territory for the year. Global equities are a neutral at best for the oil complex at the moment.
After another build in inventories in both PADD 2 and Cushing (see below for more details) the Brent/WTI spread has widened and is currently working its way toward the upper end of the trading range. The June Brent/WTI spread has been trading in a range of about $15.85/bbl on the upside to about $14/bbl on the downside. The spread and thus the whole realignment process is now stuck in a relatively tight trading range as the market now awaits the start-up of the Seaway pipeline and how that impacts the overall balances in the region. I am still expecting the spread to narrow further in a long process of the Brent/WTI spread and all of the spreads that are indexed to Brent to return to historically normal levels. This process is likely going to evolve between now and the middle of next year.

Wednesday's EIA inventory report was mixed as it showed no change in total stocks, a larger than expected build in crude oil stocks and larger than forecast draws in both gasoline and distillate fuel. Total implied demand declined as demand decreased for both gasoline and distillate fuel. Refinery utilization rates increased marginally on the week to 84.7% of capacity an increase of 0.1% 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 were about unchanged after decreasing the previous week. The year over year surplus still widened to 37 million barrels while the surplus versus the five year average for the same week decreased to 41.1 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.

Crude oil inventories increased (by 4 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 16.1 million barrels while the surplus versus the five year average for the same week came in around 26.2 million barrels. PADD 2 crude oil inventories increased by about 1.2 million barrels while Cushing, Ok crude oil inventories also increased by about 0.6 million barrels on the week.

Crude oil inventories in the mid-west region of the US have been building of late with stocks in Cushing now at the highest level it has been at since March of last year. The increase in inventories this week is mostly bullish for the Brent/WTI spread. The spread has moved higher since the inventory report but remains range bound as it is pressured from the early start of Seaway and the easing of the tensions between the West and Iran

Distillate stocks decreased strongly versus an expectation for a small seasonal build. Heating oil/diesel stocks decreased by 3.1 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 22.4 million barrels while the five year average remained in a deficit of about 6.4 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 2.2 million barrels on the week versus an expectation for a draw of about 0.8 million barrels. The surplus versus last year came in at 3.6 million barrels while the deficit versus the five year average for the same week was about 23 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 both gasoline and distillate fuel 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. At the moment the oil complex is still going through a spread realignment driven by a reduction in the tensions in the Middle East and thus a receding of the Iranian risk premium along with a sentiment swing in the Brent/WTI spread due to the early start of the Seaway pipeline. I am more comfortable staying on the sidelines today for the flat price market.
I am now moving my view back to neutral but keeping my bias at bearish. 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. 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 table below.
Best regards,
Dominick A. Chirichella
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