WTI was once again the strongest oil commodity in the complex on Friday with the Brent/WTI spread narrowing to the lowest level since July of 2012 based on the spot continuation chart. The combination of crude oil production running at normal to even above normal levels in the North Sea and Cushing crude oil stocks continuing in a destocking pattern have been the main reasons why the spread has narrowed for the last six weeks in a row.

WTI and RBOB gasoline remained within their trading ranges with WTI in the upper portion of the range and RBOB hovering near the lower range support area. Both Brent and HO have breached their lower range support areas and may be setting up inside of a new lower trading range.

The oil complex is starting a new trading week with minimal fundamental support and waning technical and external support to push prices significantly higher from current levels. Oil inventories are well supplied and with refiners in the US returning from scheduled maintenance production of both RBOB gasoline and distillate fuel is going to ramp up over the coming weeks. Crude oil demand will increase but most of the increase is coming from the robust production of domestic crudes and not by an increase in imports.

The evolving situation in Cyprus is still creating a cloud of uncertainty over most risk asset markets. Not so much by Cyprus itself but more from the potential contagion it may cause across other major parts of the EU including the long term viability of the euro currency. Since Friday there has been a lot of movement toward a new Plan "B" but as of this writing on Sunday afternoon (NY Time) a deal is not yet in place that has been approved by both the Cyprus government and the troika. The ECB imposed a Monday deadline for a deal to be in place in order for liquidity to continue to flow to the banking system in Cyprus.

Talks between Cyprus and the international lenders were at a very critical and delicate phase heading into Sunday. The President of Cyprus flew to Brussels on Sunday morning for a continuation of talks on a deal acceptable to all parties. The Cyprus government seems to be reverting back to conditions of the original deal proposed by the troika calling for a one time penalty on bank deposits over 100,000 Euros. The deal supposedly on the table is calling for a 20 percent hit on deposits over 100,000 Euros held at the Bank of Cyprus with a 4 percent levy on deposits above that level at the other troubled banks. There are still many details to work out but it seems progress is being made. I am still of the view that a deal will get done and/or the ECB Monday deadline will be pushed forward a bit if it has been deemed by the troika that real progress has been made this weekend.

There is a modestly full economic calendar for the coming week. In the US durable goods and consumer confidence gets things going on Tuesday with housing data on Wednesday. Thursday weekly initial jobless claims and Chicago PMI along with the third and final reading for Q4 GDP. Friday its consumer spending and Michigan Sentiment data.

The oil complex ended the lower across the board except for WTI (for the second week in a row) which gained on the week. The spot WTI contract gained ground on a combination of support from the externals as well as another draw in Cushing crude oil stocks. The big feature of the week in the oil complex was yet another strong narrowing of the Brent/WTI spread as the North Sea continues to operate at normal production levels.

WTI increased while Brent declined resulting in a strong narrowing of the spot Brent/WTI spread on the week. The spot WTI contract increased by 0.28 percent or $0.26/bbl while Brent declined by about 1.97 percent or $2.16/bbl. Crude oil stocks in PADD 2 decreased as did Cushing stocks fell strongly even as the Seaway pipeline remains constrained but with the refinery maintenance season starting to wind down.

The May Brent/WTI spread was lower for the sixth week in row. The May spread declined by 15.13 percent or $2.42/bbl. It is now trading below the level it was at just prior to the announcement of the Seaway pipeline bottleneck at the end of January. The spread was in a narrowing trend until the announcement hit reversing the direction and sending the spread higher by about $6/bbl. The spread has been declining since the third week of February and barring any new unscheduled interruptions in the North Sea the spread should continue in a narrowing trend.

I expect the spread to slowly continue to decline with the decline accelerating once the spring refinery maintenance season is completely over and crude oil demand returns to more normal levels. At the moment it appears that Cushing is in the early stages of a destocking trend. If this continues it will certainly add pressure on the Brent/WTI spread. That said the spread has narrowed strongly for the last six weeks and I would raise the caution flag that there is likely to be a round of short covering that could firm the spread before starting another leg down.

On the distillate fuel front the Nymex April HO contract decreased by 1.86 percent or $0.0547/gal on the week even as distillate fuel inventories declined on the week on temperatures that were winter like over parts of the US during the report period. Distillate fared better than gasoline falling about half as much as RBOB gasoline. Gasoline prices decreased strongly even with a larger than expected draw in inventories last week.

The April Nymex gasoline price decreased by 3.2 percent or $0.1013/gal this past week. The April Nat Gas futures contract increased by just 1.42 percent or $0.055/mmbtu on the week after attempting several times to stay above the technical and psychological $4/mmbtu level.

Nat Gas futures traded either side of the psychological $4/mmbtu level on both Thursday and Friday but have been unable to remain above the level for any length of time. The market has so far shrugged off Thursday's miss in the weekly EIA inventory report as the market seems to be looking more at the fact that the net withdrawal was greater than last year and the five year average for the same week. However, the fact that it is already spring and the atypically cold temperature that have been in play are likely to moderate in a week or two is capping any new push in futures prices to the upside at the moment.

The latest NOAA six to ten day and eight to fourteen day forecasts are presenting a changing picture. The shorter term forecast is showing very cold temperatures over a major portion of the eastern half of the US for the period March 27th to March 31st. This will result in an above normal level of Nat Gas related heating fuel demand through the end of March and likely additional atypical net withdrawals from inventory for this time of the year. On the other hand the forecast starts moderating during the eight to fourteen day period with cold temperatures projected over a smaller area of the US for the March 29th to April 4th timeframe. Nat Gas heating related demand will begin to subside during this period.

The next two inventory reports should show another 150 to 170 BCF of net withdrawals. Taking the middle of my range (160 BCF) that would mean that the deficit versus last year at the end of March would grow to about 660 BCF while the surplus versus the five year average would be completely eliminated. Thus the lower demand shoulder season is likely to get underway with a large deficit versus last year and about where the market has historically started this part of the year.

Even with production expected to remain robust if the upcoming summer cooling season is hotter than normal we could see another summer rally in Nat Gas prices this year. So yes the market is currently struggling to stay above the $4/mmbtu level and yes the upside rally may be starting to lose some if its upside momentum but I do not think the market is heading for a major sell-off or collapse anytime soon. Rather I am expecting a corrective move to the downside at some point and then the possible start of a new up leg if the summer cooling season is bullish for Nat Gas demand.

On the financial front equity markets around the world were mostly lower mostly driven by concerns over the evolving situation in Cyprus. The EMI Global Equity Index is now showing a loss for the year of 0.9 percent after losing 1.91 percent last week. Global equity markets were a negative price driver for the oil complex last week.

The euro and the US dollar index were both lower driven mostly by Cyprus and the US FOMC keeping the money printing presses running at full capacity. Last week the global equity markets were a negative price driver for oil and most commodity markets.

I am maintaining my view of the entire complex at neutral as the oil complex still appears to be in the process of forming a short term technical bottom. However, WTI, HO and RBOB have all remained in a sideways trading pattern with refined products trading near the lower end of the trading range while Brent has now breached its range support level. The complex may still be in a bottoming pattern but it is now looking like the probability of another down leg is increasing based on the current assessment of the fundamentals, the way the external price drivers are trading as well as the technicals.

I am maintaining my view at cautiously bullish For Nat Gas as long as the spot contract remains above the $3.82 to $3.86/mmbtu technical support area that will need to hold to keep the current uptrend in play. If this level is breached with settlements below this area there could be a modest retracement in prices. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern and currently those forecasts have continued to be supportive for heating related Nat Gas demand even though spring has arrived.

Markets were mostly higher ending the trading week as shown in the following table.

Note: Due to my schedule for Monday I am publishing Monday morning's report on Sunday afternoon.

Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.

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