Oil corrects amid small inventory build

There are three scenarios that can occur in my view. There are many variations of the scenarios I will present but I believe my three scenarios cover the range of events that can occur and what the impact might be on the price of oil. The first scenario is everything continues as is...a war or words going back and forth from both side but nothing happens insofar as impacting the supply of oil. Eventually this scenario will begin to be discounted by the market (especially if inventories remain stable and/or build) and some of the risk premium embedded in the price of oil will slowly start to recede.

The second scenario involves more talk of potential military action occurring either by the Israeli's striking Iran and/or the Iranian's undertaking a pre-emptive strike...mostly like against Israel. This will result in the risk premium widening as the market will become more convinced that a supply disruption will occur. This could bring oil price to the $115 to $130/bbl level (WTI or Brent).

Finally the last scenario does result in being the worst case ...military action actually happening. This scenario will result in the loss of oil supply for an undetermined period of time. The IEA will release oil from the global SPR but prices will likely move quickly to the levels experienced back when the all time highs were made in July of 2008. Depending on how this scenario evolves prices could actually exceed the 2008 highs by a substantial amount. Obviously this is the worst case scenario for not just oil but for the global economy. Hopefully it remains just a scenario.

On the global equity front the EMI Global Equity Index table (shown below) has moved back to the upside over the last twenty four hours. The EMI Index is now up by 0.4% for the week resulting in the year to date gain widening to 13.6%. Germany, Hong Kong and Brazil are soaring higher along with Japan. The global equity markets are clearly in an uptrend as discussed above in today's newsletter and all signs suggest that the uptrend is likely to continue with a few bumps n the road or better known as rounds of profit taking selling from time to time. Equities have been a positive price driver for oil prices as well as the broader commodity complex.

The API report showed a smaller than expected build in crude oil stocks along with surprise draws in both gasoline and distillate fuel inventories. The API reported a small build (of about 0.5 million barrels) in crude oil stocks versus an expectation for a modest draw in crude oil inventories as crude oil imports increased while refinery run rates decreased by 2.2%. The API reported a modest draw in gasoline stocks and a surprisingly larger than expected draw in distillate stocks versus an expectation for a more seasonal draw in inventories.

The report is bullish across the board. That said the changes overnight may not be from the API inventory report as prices are higher across the board and are being driven by the movement of the macro indicators and the evolving geopolitics of the Mideast region. The market remains tied to the evolving situation in Europe that has been unfolding along with the geopolitics of the mid-east this week as discussed above with inventory data a secondary driver. The API reported a build of about 0.5 million barrels of crude oil with a build of 1.6 million barrel build in Cushing and a build of about 1.3 million barrels in PADD 2 which is bullish for the Brent/WTI spread. On the week gasoline stocks declined by about 0.9 million barrels while distillate fuel stocks decreased by about 3.3 million barrels.

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