EIA projects 2012 oil demand around 2011 levels

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Nothing is so often irretrievably missed as a daily opportunity.

Marie von Ebner-Eschenbach

Geopolitics and support from the macro price drivers sent oil prices higher yesterday...including WTI, which has been the main laggard in the oil complex. WTI found additional support as modest profit taking selling hit the surging Brent/WTI spread after a recommendation by GS to sell the spread. Even with a round of spread selling the Brent/WTI spread is still hovering around the $17/bbl level (premium to Brent) and still overvalued with more downside to come. Finally, last night's API inventory report (see below for more details) showed a small draw in PADD 2 and a small build in Cushing, Okla. crude oil stocks, which is mostly neutral at the moment. The more important or more widely followed report will be the EIA report that will be released later this morning. As I have been discussing for several weeks the order of oil price drivers has changed with the macro or external price drivers playing a more secondary role while geopolitics and fundamentals are playing a more primary role in setting the direction of oil prices.

On the macro front the Greek saga is still continuing although some progress was made yesterday as the Greek government appears to have completed a deal with the Troika (ECB, IMF & EU) but not yet with the party leaders in Greece (expected today) nor the private debt holders and the Greek banks. The situation is still messy but in the midst of the uncertainly a modicum of progress is emerging.

A completely done deal in Greece will certainly bolster the external markets. It should be a positive for the euro, a negative for the US dollar and thus a positive for oil, equities and the broader commodity market. That said I am not sure how much of a done deal has already been priced into the market over the last three weeks and thus we could see a bit of sell the news happening if a deal is completed...certainly volatility will rise. I expect a deal to be completed as the EU has come a long way in trying to stem the evolving sovereign debt issue of its member countries and I do not think they will allow an un-orderly default by Greece. I remain in the camp that is expecting a deal. If and when one is struck Europe will once again move into the background (until the next crisis), which will allow most risk asset values to move based more closely on their normal fundamentals and technicals and less on the macro or external price drivers.

The global equity markets are still holding onto to the majority of the year-to-date gains as shown in the EMI Global Equity Index table below. The Index gained another 0.86% over the last 24 hours, widening the year-to-date gain to 12%. The majority of last year's losses have now been recovered (15.2% loss for the Index in 2011), which demonstrates the strength of the rally that started at the beginning of the year. It also suggests that market participants are becoming more and more confident that the global economy will be able to orchestrate a soft landing including Europe. I also still view the global equity markets as very overbought and susceptible to a round of profit taking selling sooner than later. With Europe/Greece looking like they are closer to a deal, I am not sure what the catalyst will be to slow the global equity rally. For the moment global equities are still a positive for oil prices as well as the boarder commodity complex.

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