Bearish crude fundamentals belie bullish forecast by banks

Global equities are not faring much better than oil so far this morning as shown in the EMI Global Equity Index table below. Over the last twenty four hours the Index did recover some of its week to date losses but that was mostly driven by one bourse...Brazil. In fact over the last twenty four hours only two of the ten burses in the Index have been able to add value. Overnight all of the main Asian bourses declined as the market sentiment continues to be impacted by a view that the main growth economic growth engines of the world ...Asia...are starting to show signs of slowing. On the European side the sovereign debt issues are having a negative impact on European equity markets while the snail's pace growth of the US economy is even starting to impact the number one equity market of 2011 (so far) as QE2 works its way toward an end in June. At the moment the Index is down by 0.4% for the week widening the year to date loss to 3.9%. All of the European bourses are trading lower while U.S. equity futures are pointing to a lower opening on Wall Street this morning. Needless to say global equities are also a negative for oil prices today.

The oil relief rally that was underway yesterday was derailed shortly after the API released their weekly oil inventory report late yesterday afternoon. The API report was mixed but mostly bearish on a big build in gasoline stocks. The API reported a crude oil inventory draw of about 0.9 million barrels as refinery utilization rates increased by 1.8% to 83.5% of capacity. The API reported a big decline in crude oil stocks in PADD 2 of about 1.4 million barrels or the second week in a row showing one of the largest weekly declines in over a year. They showed an expected decline in inventory for distillate fuel and a surprisingly large build in gasoline stocks. The market was expecting small builds in both gasoline and distillate fuel this week. On the week gasoline stocks decreased by about 2.4 million barrels while distillate fuel stocks were lower by about 0.8 million barrels. The results of the API report are summarized in the following table. So far the reaction to the API report has been bearish for RBOB and crude oil and modestly positive for HO. If Wednesday’s EIA report is in sync with the API report I would view it as mildly bearish especially for gasoline and it is likely to result in an extensions of the selling that is currently in place.

With the markets looking for oil price direction we may see the fundamentals have a directional impact yet again this week. At the moment with all of the financial uncertainty permeating around the global markets it is difficult to say when this week's report will impact the market. My projections for this week’s inventory reports are summarized in the following table. I am expecting mixed report with an across the board build in refined products and modest decline in crude oil stocks as a result of an increase in refinery utilization rates. I am even expecting the third weekly build in gasoline inventories in a row. I am expecting crude oil stocks to decline by about 1.3 million barrels. If the actual numbers are in sync with my projections the year over year surplus of crude oil would come in around 3.9 million barrels while the overhang versus the five year average for the same week will narrow to 20.6 million barrels.

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