Oil inventory builds add to bear trend

Moving to  the projected fundamentals or the perception of what the market is going to be like down the road I have to still view it as biased to the bearish side. Projected fundamentals are going to be driven by the perception as to how the global economy evolves over the next six months or more. As of now I view the global economy as remaining in a very slow growth pattern for the rest of this year and likely into 2013. The developed world economies are struggling to remain out of another recession period. The US seems to be on slightly more solid ground than Europe. This week's GDP data for Europe came in at no growth but a zero GDP does not count in the official definition of a recession which requires two continuous quarters of negative GDP. The fourth quarter was negative and I guess the officials call a zero GDP a positive number. I on the other hand call it recession.

On top of the paltry economy in Europe the issue of whether or not Greece will exit the EU is forming a huge cloud of uncertainty over all of the financial and commodity markets.  I still think in the long run Greece should exit the EU as I am not sure why it should have even been invited to join. The main problem of a Greek exit is it may not be very orderly creating potential unknown consequences that will more than likely be bearish for all markets. The next event for Greece will be another election in the first half of June which pretty much looks to me to be a de facto vote on whether or not to remain in the euro. Between now and then uncertainty will keep most all risk asset markets under some degree of pressure.

Neither the US nor Europe are the main growth engines for oil consumption and have not been for years. The main oil demand growth engines of the world are the emerging market countries in particular China and India. Both of these economies (and pretty much most of the emerging market world) are all experiencing a slowing of their economy as they all move to some form of monetary and fiscal stimulus to try to jump start their economies. The results of an easy money policy does not mean that those economies are going to return to an above average growth rate tomorrow...it will take months if not years. The current projected state of the emerging market world remains bearish for any major growth spurt in oil consumption.

Overall oil prices are likely to decline further and back to levels that are much more representative of a global economy that is growing in slow motion. Right now the spot WTI contract is trading at levels it was at in mid-December of 2011. If the current support levels do not hold I expect oil prices (basis WTI) to move back into the $80 to $90/bbl trading range that was in place back in the 3rd quarter of 2011 and a level when there was  no immediate geopolitical risk as well as a timeframe representing a view of a much slower growth rate for the global economy and oil consumption.

I also view tomorrow's start of the Seaway Pipeline as the beginning of the normalization process for the Brent/WTI spread and thus the normalization of all oil commodities back to more historical relationships with WTI. I still expect the Brent/WTI spread to slowly move toward normalization over the next six to 12 months.

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