Oil inventories build while refinery utilization drops

“Few things are harder to put up with than a good example.”

Mark Twain

The downside correction continued in the oil complex as well as in the broader commodity complex and in many of the global equity markets on Tuesday but seems to have stalled as of this morning. Uncertainty has once again emerged as a result of the intentional slowing of the emerging market countries as they accelerate their fight against inflation risk along with the reminder that some of the developed world countries could potentially see a double dip after yesterday's bearish fourth quarter GDP report out of the UK. The fact that the Saudi Arabian Oil Minster indicated over the media airwaves that Saudi and the rest of OPEC are likely to put more oil into the market to meet any additional increase in demand left the oil bulls a bit nervous that the short term run to the upside may be over for the moment.

That all said overnight the China Petroleum and Chemical Industry Association indicated that refinery processing may increase by about 7.5% in 2011 reminding the world that the main oil demand growth engine is still a factor in the overall movement of supply, demand and global inventories toward a pre-recession level. China represent about 30% of the world's projected oil demand growth this year. This has resulted in crude oil prices rising a bit overnight after getting pummeled over the last several days. The upside reaction has spurred Brent even higher as more and more oil investor/traders continue to trade the Brent contract (open interest is continuing to rise) over WTI as many now view Brent as a better gauge of the world oil situation. The fact that inventories are hovering near record high levels in both PADD2 and Cushing, OK with even more Canadian crude heading to this area of the US suggests to most participants that the relationship of WTI to the other world's crude oil is very undervalued and not truly representative of the bigger oil supply & demand picture. WTI is now trading at a discount of about $9.65/bbl below Brent or at record low levels with no short term solution to the overhang of crude oil in the US mid-west region.

Back to the externals, the global equity markets added modest gains over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is now higher by 0.4% for the week resulting in the year to date Index level widening to 1.2%. Canada and China remain in the negative column with the Canadian bourse under pressure as a result of the commodity correction to the downside while China's equity markets remain under pressure as a result of the expected further tightening of the Chinese economy. So far European bourses are heading higher as is US equity futures markets suggesting a higher open on Wall Street this morning. Heading into the US trading session equity markets are modestly positive for oil prices as well as the broader commodity complex.

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