Oil prices are mixed in overnight trading after a supportive API oil inventory report that has been offset by yet another sign that the main economic and oil demand growth engine of the world… China is slowing. The latest manufacturing data out of China weakened more than expected for July. The HSBC/Markit reading came in at 47.7 or solidly below the expansion threshold of 50. The PMI data is an energy sensitive Index and with China in the contraction mode it certainly suggests that oil demand growth out of China is likely to be less than has been forecast so far.

On the other side of the world the Eurozone manufacturing index actually came in better than expected for July led by strong growth out of Germany. For the first time in two years the Index came in at 50.1 or above the expansion threshold and above the 48.8 level from June. This could be an early sign that the EU economy may finally be starting to bottom and beginning to work its way out of recession.

The Brent/WTI spread is back on the defensive so far this morning after a modest short covering rally over the last day or so. The spot September spread has narrowed to a $70/bbl premium of Brent over WTI after trading well over the $1.50/bbl level yesterday. Last night's API data showed another large draw of 2.1 million barrels from Cushing strongly suggesting that the destocking pattern that has been in play for the last month or so is likely to continue. Cushing stocks are still above normal but now stand at the lowest level of the year.

I view the activity over the last few days as primarily a short covering rally and not yet a structural change in the narrowing trend of the spread that has been in play since February of this year. The spread has already hit parity and actually traded with WTI at a premium to Brent on an intraday basis on both Friday and Monday. I expect the narrowing trend to remain in place.

Global equity markets have added slightly to the gains of the week in overnight trading so far. The EMI Global Equity index gained another 0.28 percent narrowing the year to date loss to 2.7 percent. The Index is back to levels not seen since late May/early June. The bourses with very accommodative monetary policies and quantitative easing programs in play remain the best performers in the Index with Japan still holding the top spot. On the other hand Brazil, China and Hong Kong remain in the loser's column with Brazil still showing the largest year to date loss. Equities have been a mostly positive price driver for the oil complex and broader commodity markets so far this week.

Tuesday's API report was supportive for higher oil prices with a draws across the board. Total crude oil stocks decreased within the expectations by 1.4 million barrels even as crude oil imports increased modesty but refinery run rates decreased by 0.2 percent. The API reported a draw in both distillate fuel inventories and in gasoline stocks.

The entire oil complex is lower as of this writing and heading into the EIA oil inventory report to be released at 10:30 AM EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning. On the week gasoline stocks decreased by about 0.9 million barrels while distillate fuel stocks decreased by about 0.7 million barrels.

The API reported Cushing crude oil stocks decreased strongly by 2.1 million barrels. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the spread.

My projections for this week's inventory report are summarized in the following table. I am expecting another modest draw in crude oil inventories with a build in both gasoline and distillate fuel stocks.

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 comparison for crude oil will now show a deficit of 14.6 million barrels while the overhang versus the five year average for the same week will come in around 20.8 million barrels.

I am expecting crude oil stocks in Cushing, Ok to decrease this week and continue its destocking trend. This will be bearish for the Brent/WTI spread as the fundamentals are in play and are driving the spread (see above for a more detailed discussion).

With refinery runs expected to increase by 0.2 percent I am expecting a build in gasoline stocks. Gasoline stocks are expected to increase by 1.3 million barrels which would result in the gasoline year over year surplus of around 15.4 million barrels while the surplus versus the five year average for the same week will come in around 10 million barrels.

Distillate fuel is projected to increase by 1.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 4 million barrels above last year while the deficit versus the five year average will come in around 16.6 million barrels.

The above 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 mostly in directional sync with some differences compared to last year's changes. 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 most everything in the complex.

I remain cautiously bullish for the overall oil complex. The overall oil fundamental picture has been improving over the last several weeks and along with the changing view of how long QE3 may or may not last in the US is providing support to the oil complex on a macro basis. I am raising the caution flag that the current round of profit taking selling sold continue for a few more days. Although I still view the overall trend as still in play further retracement in prices… especially for WTI should not be a surprise.

I am maintaining my Nat Gas view at neutral and my bias at neutral based on a less supportive short term temperature forecast. The fundamental picture could begin to shift if the temperatures do not remain above normal on both coasts.

Markets are mixed heading into the US trading session as shown in the following table.

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy.

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