Quote of the Day
Logic will get you from A to B. Imagination will take you everywhere.
Albert Einstein
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Oil prices still remain near the highs of the current move but have drifted a bit lower overnight even as Gaddafi has once again bombed the oil port city of Brega. So far the opposition group has been able to hold its ground even with the bombing. They are now calling on the international community to respond with air strikes. The overall situation in Libya does not look any better today than it did a week ago...in fact it is worse. All signs continue to point to a prolonged problem in Libya likely leading to a civil war. So far the most recent estimates suggests that about 1 million barrels per day of Libyan oil has been shut-in.

Overnight the Arab League along with Venezuela have offered to mediate the resolution of the crisis in Libya. There are reports that Gaddafi and Chavez have discussed a peace proposal. There are also rumors circulating around the media airwaves that Gaddafi has accepted the initiatives by the Arab League and Venezuela. It really sounds interesting that the least democratic nations on the face of the earth are in the midst of trying to resolve the problem in Libya when in fact the way Libya and these countries are run is the reason there is a problem in the first place. It is about freedom which most Arab League countries and Venezuela are really short of. That said the latest initiative has seemed to at least slowed down the meteoric rise in oil prices for the moment.

However the situation evolves in Libya the rest of North Africa and the greater Middle East are still at a high risk for contagion. The freedom movement is in the air and it will not simply go away overnight. It will also not spread overnight either. This is going to be a prolonged process that is likely to see more protests coming from many of the autocratic nations in the region with the strong possibility that some of the existing leaders could be toppled...like Gaddafi. It is almost impossible to predict what will happen in each of the countries in the area. It is equally impossible to predict what the impact will be on the flow of oil in the short term as well as the longer term. However these countries evolve the fact that oil sales are principally there only main revenue source I believe that whoever is ultimately in charge in each country they will do whatever they can to keep the oil flowing.

During US trading hours the selling of equity assets seemed to subside even with higher oil prices. That has turned into buying since Asia opened even with oil prices still near their highs of the week. The EMI Global Equity Index (table shown below) has now moved back into positive territory for the week and the year to date showing a gain for both of 1%. Nine of the ten bourses in the Index have added value over the last twenty four hours with the exception of China. Brazil remains the only bourse still in negative territory for the year to date.
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The markets have been looking at the latest batch of macroeconomic data hitting the media airwaves over the last several days and most all of it has been a positive for the global economies including the latest ADP jobs data released in the US yesterday. The big macroeconomic data point will be tomorrow's nonfarm payroll data which is expected to show a significantly larger increase in jobs than last month's paltry 36,000 jobs. The markets are also closely watching and waiting on the outcome of the ECB monthly meeting insofar as their interest rate policy and going forward guidance of the EU economy. This will be a potential market mover sometime this morning.

Yesterday's EIA inventory report was mostly bullish but also mostly ignored as a result of the overwhelming focus on the evolving situation in Libya. All of the major oil commodities came in better than the expectations with total commercial stocks declining strongly for the third week in a row. There was only a modest decline in crude oil stocks, and another large surprise decline in gasoline stocks as refinery utilization rates actually increased strongly by 1.5% (offsetting last week's strong decrease of 1.8%) while distillate fuel declined within the expectations. The EIA oil inventory report was overall bullish in my view. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
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Total commercial stocks of crude oil and refined products declined by 6.5 million barrels on the week after declining by 12.1 million barrels last week bringing the three week total decline to over 26 million barrels. The year over year surplus of total commercial stocks of crude oil and refined products narrowed to 4.5 million barrels while the overhang versus the five year average for the same week also narrowed to 33.6 million barrels.

The modest draw in crude oil inventories of 0.3 million barrels versus most expectations for a build added to the decline in refined and unfinished products resulting in total commercial stocks declining. The crude oil inventory overhang versus last year narrowed to 4.8 million barrels while the surplus versus the five year average also narrowed to 14.8 million barrels. PADD 2 stocks increased strongly by about 2.2 million barrels while Cushing, Ok crude oil stocks increased marginally by about 1.1 million barrels on the week. The situation in the US mid-west is still hovering near record high crude oil inventory levels and basis this week's data there should be no market pressures that is likely to narrow the Brent/WTI spread in a major way. Much like everything else in the oil complex the short term direction of the Brent/WTI spread is being driven by the evolving situation in Libya. When the 30 second news snippets signal market participants to buy the spread narrows…when it appears there will be calm for the moment the spread widens back out as it has in the last twenty four hours.

This region of the US is still sitting with record high inventory levels and as such WTI should still continue to trade at a large discount to Brent which is much more reflective of the events unfolding in the Middle East. The April Brent/WTI spread is currently trading around $14.00/bbl premium to the Brent contract as a risk premium is slowly growing in Brent while an overhang discount is continuing to grow in the price of WTI. WTI and Brent are two different crudes currently being driven by two different scenarios. WTI remains mostly decoupled from the geopolitical event occurring in the Middle East while Brent is decoupled from the huge regional overhang of crude oil inventories in the mid-west portion of the US. Much like the flat price direction of oil one can only look for opportunities to get long Bent/short WTI as the trading pattern is not likely to change anytime soon.

Distillate stocks declined strongly versus an expectation for a modest decline in stocks. Heating oil/diesel stocks decreased by about 0.7 million barrels versus an expectation for a draw of around 0.7 million barrels. The decline was all in the heating oil category with diesel fuel stocks build on the week. The year over year surplus held steady at 7.4 million barrel while the five year average overhang widened to 24.5 million barrels.

Gasoline inventories decreased strongly on the week versus an expectation for only a modest decline in stocks. Total gasoline stocks declined by about 3.6 million barrels on the week versus an expectation for a draw of about 0.5 million barrels. That said over the last nine weeks gasoline stocks are still higher by almost 21 million barrels. The deficit versus last year is gone but the surplus did narrow on the week to about 2.8 million barrels above last year at this time while the surplus versus the five year average also narrowed to 9.5 million barrels. Gasoline stocks remain on the radar as the concern grows that the overhang may be declining at just the wrong time insofar as the potential for supply disruption continues to be at the highest level in year and with Libyan oil already shut in. In fact retail gasoline prices have been soaring in the US with last week's increases the second largest one week increase on record.

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 categorized gasoline and distillate fuel as bullish with crude oil and Jet as neutral. That said I would categorize this weekâ€TMs report was overall bullish. However, we canâ€TMt lose sight of the fact that overall stocks in the US are still above normal and likely to remain at above normal levels for a considerable period of time even if the destocking pattern we are beginning to see continues to evolve over the next several months.
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My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my overall view to be in sync with my bullish bias for all of the reasons I have been discussing over the last week. But again I raise the caution flag that prices are a bit overdone and susceptible to a correction. Any event can trigger a sudden change in the direction of prices as we saw over the last few trading sessions. Be cautious and use tight, trailing stops in your short term trading book.

I am maintaining my Nat Gas view and bias at neutral as I think the Nat Gas market is still range bound but now trading near another critical technical support level of $3.85/mmbtu.

Currently oil markets are mostly lower as shown in the EMI Price Board table below.
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Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com