Oil prices await inventory data against a backdrop of surging industrial metal prices as China juices up both stimulus spending and capital controls. This comes after OPEC’s crude production fell by 310,000 barrels a day in December and the American Petroleum Institute shocks the market for the third week in a row with a massive 7.43-million-barrel crude oil draw. The fundamentals are getting wild and wooly as we get prepared for a warm up and then maybe another arctic blast depending on what weather forecaster you want to believe.

Oil prices seemed to ignore the Fed that may be getting ready to boost interest rates on dollar weakness. The Fed did take notice of the fact that OPEC production fell in December in what might be an early sign of OPEC compliance. OPEC production fell by 310,00 barrels a day and while most of that was in Nigeria, a drop in Saudi Production of 50,000 barrels a day indicates that maybe the kingdom is getting ready to lower their daily output. Oil traders are focusing on compliance and the bears are betting that this deal will fall apart but despite OPEC’s bad reputation, we will see high compliance. We already have positive signs.

Of course a change in the Venezuelan oil minister is raising some concern especially because the outgoing minster was a key proponent of the OPEC cut. We did see Venezuela’s output rise a bit but overall they have had trouble maintain output. Reuters reported that Venezuelan President Nicolas Maduro on Wednesday named legislator Ramon Lobo as the country's new economy czar and tapped oil industry veteran Nelson Martinez, who has led U.S. owned refiner Citgo, to serve as oil minister. Eulogio Del Pino, who has been serving as both oil minister and president of state oil company PDVSA, will stay on as president of PDVSA, Maduro said during a televised broadcast. 

The industrial metals love talk of more Chinese economic stimulus, hard capital controls in China are raising concerns about their longer-term ability to grow. While China data currently suggest strong demand for all industrial metals and oil, concerns about liquidity and the ability to borrow is a concern as the Chinese are buying all the gold and bitcoins they can get their hands on fearing a weaker yuan. Still it looks like the capital controls, at least for the day, are helping the yuan. Bloomberg News reported that the yuan gained 0.5 percent in Hong Kong, taking its two-day move to 1.8 percent and is poised for its biggest gain in data going back to 2010. The overnight deposit rate in the city rose as high as a record 100 percent, while the spread between the offshore and onshore exchange rates reached the widest since 2010. Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency. While in the short term this is very bullish for metals and oil, the strength of the Chinese economy could shape up to be a risk factor later in the year.

The API has done it again by reporting a very bullish 7.43 million barrel drop in crude oil supply. It would be wildly bullish if it were not for the fact that the API also reported a 4.25-million-barrel increase in gasoline supply and a 5.24-million-barrel increase in distillates. The API numbers in recent weeks have been wacky! We have seen huge swings both higher and lower while the EIA has been more subdued. On the face of it, it is very bullish even with very big builds in gasoline and distillate. Yet market reaction for now seems to be muted as traders might be losing confidence in the API number. The API is a non-mandatory reporting agency and they are charging industry insiders, the same ones providing the numbers early access. Perhaps the holiday and short staff for some oil companies are accounting for the madness but it is hurting API’s image with some traders. So if the EIA report does not show similar numbers, we’ll hear some criticism of the API.

What warm up? Natural gas futures plummeted to start the new year on weather models that supposedly show that we are going to see a sustained warmup. Yet many weather forecasters are calling that into question as their models show a return to the arctic blast.

I cannot remember a year when we have seen such conflicting forecasts on weather and my concern is it is masking what could be a natural gas crisis in this country. We may soon see shortages on the West Coast and with our surplus nationally wiped out, we could see supply evaporate at a record pace if the cold returns. As for today, look for that natural gas report to be your guide. This may be the only bearish report we have this winter.