Oil looking toppy amid economic headwinds

At the moment oil prices are still being mostly driven by the events discussed above along with the direction of the euro and the US dollar as well as by a view that the global economy is continuing to slow. The tensions evolving in the Middle East between Iran and the West seem to be ratcheting up again even though another meeting is scheduled for July 24th. As such we may not see much of a reaction from market participants to this week's round of oil inventory data as the macro risk of the markets is currently the main concern of all market players. This week's oil inventory report will likely be a background price catalyst unless the actual outcome is significantly different from the market projections.

My projections for this week’s inventory report are summarized in the following table. I am expecting the US refining sector to continue its campaign of converting a portion of the surplus crude that has been building for the last several months into refined products... in particular gasoline and distillate fuels whose inventories have been in decline.  I am expecting a draw in crude oil inventories and a build in both gasoline and distillate fuel stocks as the heart of the summer driving season is now in full play. 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 surplus of crude oil will come in around 21.2 million barrels while the overhang versus the five year average for the same week will narrow to around 36.3 million barrels.

I am also expecting a modest draw in crude oil stocks in Cushing, Ok as the Seaway pipeline is now pumping and refinery run rates are continuing at high levels in that region of the US. This would be bearish for the Brent/WTI spread in the short term which is now trading around the $15.25/bbl premium to Brent level. I am still of the view that the spread will continue the process of normalization over the next 3 to 6 months.

With refinery runs expected to increase by 0.1% I am expecting modest build in gasoline stocks. Gasoline stocks are expected to increase by 1.3 million barrels which would result in the gasoline year over year deficit coming in around 2.7 million barrels while the deficit versus the five year average for the same week will come in around 4 million barrels.  

Distillate fuel is projected to increase by 1.5 million barrels. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 22.6 million barrels below last year while the deficit versus the five year average will come in around 20.6 million barrels. Exports of distillate fuel have been the main storyline this year with exports running around 1 million bpd.

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