The global equity markets have benefited by the combination of a short covering rally and a modest level of risk on trading taking place over the last 24 hours. After declining by 15.2% for 2011 the EMI Global Equity Index (table shown below) is starting 2012 with a 3% gain. Although it is very early in the year the US is not in the top spot (for the first time in about a year) with Brazil and Germany holding the top for the moment. I view the gains in Germany, Brazil and few other places as much more a result of short covering and thus the big moves while I look at the US gain as being more in line with risk on trading and to a lesser extent short covering. At least for the moment the global equity markets have been supportive for oil prices as well as the broader commodity complex.
At the moment oil prices are being mostly driven by the tensions building in the Middle East between Iran and the West (as discussed above) coupled with the direction of the euro and the US dollar. As such I am not sure many market participants are going to pay much attention to this week's round of oil inventory data 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 new snippets out of the Middle East and 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. The normal weekly reports get underway this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Thursday morning at 11 AM EST.
My projections for this week’s inventory reports are summarized in the following table. I do want to caution that there could be surprises in the data as the industry adjusts their inventory levels to meet whatever their LIFO accounting objectives turned out to be for 2011. We have seen some of this already over the last several weeks. I am expecting mixed inventory data with a small increase in refinery utilization rates which should result in a neutral weekly fundamental snapshot. I am expecting a modest draw in crude oil stocks with an increase in refinery utilization rates. I am expecting a modest build in gasoline inventories and only a small build in distillate fuel stocks as winter like weather did not arrive during the report period in most parts of the US...especially the large HO market along the north east. I am expecting crude oil stocks to decrease by about 1.5 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will come in around 13.2 million barrels while the overhang versus the five year average for the same week will come in around 4.2 million barrels.