Oil sees short covering rally as Europe moves to background

The API data showed across the board draws. The API reported a large draw in crude oil stocks versus an expectation for a modest decline in crude oil inventories of about 4.6 million barrels as crude oil imports decreased and refinery run rates also decreased by 2.1%. The API reported basically small draw in gasoline stocks versus projections for a modest build and a larger than expected draw in distillate fuel inventories.

The market was expecting a modest draw in crude oil stocks and a modest build in gasoline with a small draw in distillate fuel inventories this week. The report is somewhat bullish for the entire complex. That said it is difficult to differentiate whether the gains overnight were from the inventory report (I doubt it) or from the falling USD and positives out of Europe (most likely). The market remains hostage to the evolving situation in Europe that has been unfolding once again this week as discussed above with inventory data a secondary driver. The API reported a draw of about 4.6 million barrels of crude oil with a 1.1 million barrel draw in Cushing but a build of about 1.7 million barrels in PADD 2 which is neutral for the Brent/WTI spread which has been somewhat range bound since the middle of November. On the week gasoline stocks declined by about 0.4 million barrels while distillate fuel stocks declined by about 2.8 million barrels. The more widely watched EIA data will be released this morning. Whether or not the market will react to anything that comes out of the EIA this morning will be dependent on what revolves around Europe today. Finally keep in mind that the large variations from the expectations are likely related to the industry starting to adjust their inventories for LIFO accounting purposes.

Oil remains mostly coupled to the direction of the USD and the euro and will remain in this pattern for the foreseeable future or until Europe completely moves into the background. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe and the US are still in the midst of uncertainty suggesting that this week's oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. As such this week's oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report.

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