As I pointed out earlier in the week the correlations between the price of oil and the macro or external price drivers have been changing with more emphasis being placed by market participants on the fundamentals and technicals of oil. This shifting of price drivers has continued for the last few days with oil prices (basis WTI) now trading at the lowest level in about the last six weeks or so while the externals are trading in a direction that would have normally pushed oil prices higher. Yesterday's EIA oil inventory report was bearish (see below for a more detailed discussion of the inventory report) and has played a major role in the most recent leg down in oil prices.

From a technical perspective (refer to the following chart of the spot Nymex WTI continuation chart) WTI has been in a wide trading range of between $92 to $104/bbl since the middle of October of 2011. Since the beginning of this year prices have been slowly moving lower after failing to breach the upper resistance level of the trading range and are now sitting at an intermediate support area of around the $97/bbl level. With little fundamental support the market is looking like it is setting up to breach the intermediate support level and possibly work its way down to a test of the range support area of $92/ bbl. width=630 On a broader basis Brent has been trading in a wide trading range also since last October. However, due to the geopolitical risk surrounding Iran and Nigeria (of late) Brent is still carrying a modest risk premium over WTI and since the beginning of the year Brent has held above its intermediate range support and over the last several days it has been able to slowly gain value and result in a widening of the Brent/WTI spread. Certainly the fact that inventories in both PADD 2 and Cushing, Ok increased by about 1.5 million barrels last week also contributed to the strengthening of the Brent/WTI spread.

On the macro or external front the economic data that has hit the media airwaves on a global basis this week has been neutral to marginally positive with the potentially big market moving US nonfarm payroll data due out tomorrow morning. The market is expecting a gain of about 175,000 new jobs with the headline unemployment rate expected to hold steady. The market could be disappointed as yesterday's ADP private sector job number came in below the expectations. How the economic data evolves over the next several weeks will be how the market projects whether or not the US Fed will eventually embark on another around of quantitative easing. If the economic data is suggesting that the economy is slowing down again it will quickly price in a higher likelihood of another QE. That pricing in of more QE could result in pushing oil and other commodity prices higher in expectation of an increase in inflation.

On the equity front global equities have continued in the uptrend that that they have been in for most of the year (so far) as shown in the EMI Global Equity Index table below. The EMI Index has gained 1.7% for the week widening the year to date gain to 10.1%. Two-thirds of last year's loss has now been recovered. Brazil has moved into the top spot as the number one gainer for the year while Hong Kong and Germany fill out the rest of the top three list. The main losers for last year have switched to be the main gainers for this year so far. The equity markets are signaling that the global economy may be entering a soft landing period with even suggesting that Europe could possibly moving to the background as evidenced by the way the three European bourses in the Index are trading... especially Germany. Yesterday's EIA inventory report was bearish across the board as it showed a modest build in total stocks, a larger than expected build in crude oil and gasoline stocks and a smaller than expected draw in distillate fuel as implied demand declined strongly across the board even as refinery utilization rates decreased on the week to 81.8% of capacity a decrease of 0.4% 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 increased modestly on the week by 4.2 million barrels after increasing over 3.4 million barrels the previous week. The year over year status of total commercial stocks of crude oil and refined products remains in a deficit position for the 44th week in a row versus the previous year. The year over year deficit came in at 34.9 million barrels while the surplus versus the five year average for the same week came in around 1.0 million barrels.

Crude oil inventories increased noticeably more than the expectations for only a modest build. With an increase in stocks this week the crude oil inventory status versus last year is now showing a deficit of only around 4.2 million barrels while the surplus versus the five year average for the same week widened to around 13.6 million barrels. Both PADD 2 and Cushing, Ok crude oil inventories increased by about 1.5 million barrels on the week.

Crude oil inventories in the mid-west region of the US have been in a decline and are still at levels not seen since 2010 when the Brent/WTI spread was trading at significantly lower levels. However, the large increase in inventories this week coupled with the evolving geopolitical events surrounding Iran and Nigeria have all contributed to the Brent/WTI spread widening on the week and now trading above the trading range the spread has been in for the past few weeks. On the premise that the geopolitical events remain in the foreground the spread seems to positioning itself for a test of $16 to $17/bbl trading level or next resistance level for the spread.

Distillate stocks decreased marginally versus an expectation for a larger draw. Heating oil/diesel stocks increased by only 0.1 million barrels. The year over year deficit narrowed to 18.7 million barrels while the five year average deficit narrowed to about 1.1 million barrels. With the economics and demand still likely to hold outside the US and unless the upcoming winter heating season starts to get much colder the current level of exports will likely continue.

Gasoline inventories built strongly in spite of all of the unscheduled refinery issues of late. Total gasoline stocks increased by about 4.2 million barrels on the week versus an expectation for a build of about 1.0 million barrels. The deficit versus last year came in at 6.1 million barrels while the surplus versus the five year average for the same week held steady at about 3.3 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 an bearish categorization across the board as stock levels are rising while demand is falling (strongly this week). The WTI is hovering around the intermediate support level while Brent is in a slowly evolving uptrend. The momentum has changed and continuing to look toppy...especially for WTI. However, I am still keeping my view at neutral (with a bias to the downside for WTI). I am currently expecting intermediate support around the $97.00/bbl area basis WTI and $109.50/bbl level for Brent with resistance around the $104/bbl level for WTI and $113.75/bbl for Brent. I am still keeping my view at neutral and bias at short as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. Today's EIA inventory report is expected to underperform and thus be viewed bearishly by the market. 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.

The most interesting non- bearish news starting to surface is more producers (Shell the latest) indicating that they are going to shift their investment focus from shale gas while increasing their investment budgets to oil shale simply due to the growing ratio of oil to Nat Gas prices. In the short term statements like this could give the Nat Gas shorts a bit of a concern and can act as a catalyst for a short covering rally. However, the Shell statement is focused on investments and will not likely have any impact on Nat Gas production in the short to medium term and as such the oversupply will continue to cap any short covering price gains.

Currently markets are mixed as shown in the following table.

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