Oil trades risk-on after Spanish auction despite inventory build

Even with refinery runs expected to increase by 0.2% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by about 1.0 million barrels which would result in the gasoline year over year surplus coming in around 6.9 million barrels while the deficit versus the five year average for the same week will come in around 18.1 million barrels.  

Distillate fuel is projected to decrease by 0.3 million barrels on a combination of steady exports and strong demand coming from the summer crop plantings. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 19.2 million barrels below last year while the deficit versus the five year average will come in around 0.5 million barrels.

I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $107/bbl. At the moment the oil complex is going through a spread realignment driven by a reduction in the tensions in the Middle East and thus a receding of the Iranian risk premium along with a sentiment swing in the Brent/WTI spread due to the early start of the Seaway pipeline. I am more comfortable staying on the sidelines today for the flat price market.

I am still keeping my view at and bias at bearish. My overall view remains biased to the bearish side.  The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season.  As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.

So goes the early week short covering rally and back to the more normal movement for Nat Gas...lower. The market remains in the downtrend with no signs of any structural changes at this point in time. Today we hit a new fresh 10 year low in Nat Gas futures prices and I still believe new lows are yet to come. Nat Gas reminds me of when my grandchildren are in the car for a ride...much like all kids they continue to ask are we there yet. Translating to Nat Gas and for all of the bottom pickers we are not there yet. We are in the midst of the low demand shoulder season and at the moment I do not see anything that can change the demand side of the equation.

As I have said way too many times in this newsletter...but it is still the case....only significant supply cuts are going to stop the slow deterioration in the value of Nat Gas. There is simply too much supply chasing too little demand at this time of the year and the net result is and will continue to be inventories working their way toward the maximum storage capacity far too soon this year.  Yes I see lower prices until supply is curtailed either voluntarily or forced via hurricanes and/or infrastructure limitations (storage).

Currently markets are mixed as shown in the table below.

Chart 3

Best regards,       

Dominick A. Chirichella

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