Crude oil and byproduct supply disparity is leveling off

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The bloom came off the rose on Tuesday as equities were unable to hold on to earlier gains and ended the U.S. session in negative territory. Oil also followed equities closing well below the highs made in early morning trading. Today was more of a day driven by a lack of any new supporting data rather than a trading session driven by a plethora of new bearish data. In other words today was more driven by light profit taking selling after several weeks of mostly up days. The markets are clearly in a perception trading mode with the possibility of a new ECB bond buying program as the main impetus that has been driving oil and most risk asset markets for the last month or so. If the EU is able to turn around the sovereign debt issues this economy may start to move out of its malaise and recession and start to expand. If so oil demand in Europe could turn around and also start to expand.

At the moment there is an ample supply of crude oil in the world but refined product inventories in the United States have been running below both last year and the five-year average for most of this year. In fact distillate fuel stocks are significantly below last year and the five-year average as exports of diesel fuel have continued to grow with distillate exports over a million barrels per day. Tonight's API inventory report showed another surprise draw in distillate fuel stocks (see below for more details).

As mentioned above the equities markets did not carry through to the upside during U.S. trading hours as shown in the EMI Global Equity Index table below. The EMI Index gave back all of Monday's gains and is now unchanged for the week. The EMI Index year to date gain is back to 6% with one bourse, China, still in negative territory. Germany, the leader of the Index, topped the 20% gain level of 2012 today with only the Paris CAC 40 showing double digit gains for the year. Equities have been a positive driver for oil prices for the last month or so but on Monday U.S. equities pushed oil prices well off of its highs.

Overall I would not take too much from Monday's trading action as it was simply a profit taking day after several days in a row of gains. Although oil prices are overvalued basis current fundamentals they are well supported by the evolving geopolitical situation in the Middle East as well as the prospects for an EU solution and possible easing from both the U.S. and Europe. For the moment I think we are in a buy the dip mode rather than the beginning of a sustained downtrend.

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