Oil prices dragged lower by falling equity prices

Oil prices were able to hold onto their first set of gains in about three days as the market looks more and more like it is building in some sort of a positive response from the US Fed insofar as another new round of stimulus in some form. That form could be QE3, Operation Twist or something else that might be a surprise. But if nothing new comes out of the meeting (outcome will be 2:15 PM EST. on Wednesday) there will be a very strong round of selling hitting oil prices as well as most other risk asset markets. The Fed is under the gun to do something other than to take a position of observation. The market is looking for positive action.

The global equity markets were not as positive as the oil markets as we saw mixed results in the EMI Global Equity Index as shown in the following table. Ahead of the opening in Asia the Index has lost about 0.35% over the last twenty four hours widening the weekly loss to 1.2% as the year to date loss moves further into negative territory to 15.3%. Seven of the ten bourses in the Index continue to show double digit losses for 2011 with the US Dow still losing the least in the list of bourses while Paris holds the bottom spot in the Index. Most of the European bourses staged a modest short covering rally on news that Greece is making progress with its main lenders. The US market lost most of its earlier gains as we approached the close. At the moment the global equity market is still acting as a negative price driver for oil as well as the broader commodity complex as falling equity values are signaling further contractions in the global economy (as we saw forecasted by the IMF report).

The API data came in directionally in-line with most of the forecasts including mine. The API reported a modest build in crude oil inventories of about 2.6 million barrels... mostly all a result of the return back to normal of production and imports since TS Lee. The API reported only a small build for both gasoline and distillate fuel (right direction but below the estimates) even as refinery utilization rates increased by 0.5% or more than the expectations.

The market was expecting a more modest build in crude oil stocks and a larger build in gasoline and distillate fuel inventories this week. The report is overall neutral to slightly biased to the bearish side. The API reported a build of about 2.6 million barrels of crude oil with a 317,000 barrels decline in Cushing and a draw of 1.6 million barrels in PADD 2. The bulk of the build was in PADD 3 or the Gulf region all related to the recovery from TS Lee. On the week gasoline stocks increased by about 0.1 million barrels while distillate fuel stocks were built by about 0.1 million barrels. The refined products part of the report was also neutral.

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