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Stimulus from China versus concerns about Europe is creating a tug of war across the commodity complex. China’s central bank moved to drive down interest rates by selling $26 billion in seven day note and another $16.15 billion in 28 day notes to try to give the market a bit of a jolt. The problem is that their efforts were offset by the lack of progress surrounding a proposed Spanish bailout and the overall prospects for the Euro zone.

The International Monetary Fund cut its growth forecast for Greece and Spain as well as the emerging markets and says the global risks of serious global slowdown is alarmingly high which is not a pleasant prospect for oil bulls. The other fear is that Spain won’t ask for a bailout and that Europe will move head first into their own version of a fiscal cliff as animosity and ego may get in the way of the latest EU Band Aid.

European Central Bank head Mario Draghi says he has the answer and he is urging the rest of Europe to create a common bank bailout fund. Without it Mr. Draghi says that the entire European economy might be at risk and may not survive a Lehman like moment.

WTI oil prices also seem to be losing their relationship to the Brent crude as Middle East tensions are heating up. Not only is Turkey and Syria going at it, it was reported by CNN that Palestinian militants claimed to have fired 20 mortar rounds from Gaza into Israel in retaliation for a strike that wounded 11 people. The Israel Defense Force said Sunday's strike targeted two members of a Gaza-based jihad network who were suspected in a June attack that left an Israeli soldier dead. The Wall Street Journal Reports that the U.S. benchmark grade hit the biggest discount versus European futures in almost a year. West Texas Intermediate crude gained as much as 1.1 percent after sliding 2.6 percent in the prior two days and reaching technical support levels. The contract’s discount to London- traded Brent oil closed at $22.49 yesterday, the widest gap since Oct. 20, 2011. The U.S. Energy Department is scheduled to release its weekly report on production and stockpiles Oct. 11.

California is dreaming and their nightmare might almost be over!  Bloomberg News reported that the premium for California-blend gasoline, or Carbob, fell by more than half after Governor Jerry Brown directed state regulators to let refineries make winter blend fuel. 
The premium for California-blend gasoline in Los Angeles versus futures on the New York Mercantile Exchange, lost 42.5 cents to 37.5 cents at 1:36 p.m. in New York, according to data compiled by Bloomberg. The same fuel in San Francisco slumped 42.5 cents to 30.5 cents a gallon above futures. 
California-grade, or CARB, diesel in Los Angeles fell 4.75 cents to 11 cents a gallon higher than heating oil futures on the Nymex. The fuel in San Francisco dropped 5 cents to a premium of 11.5 cents a gallon versus futures.  Conventional, 87-octane gasoline in Portland, Oregon, lost 7.5 cents to 27.5 cents a gallon against gasoline futures.

Natural gas traders may be taking the pipe with all the new pipelines coming on board. The Shale Reporter says that the Federal Energy Regulatory Commission lists several other Pennsylvania pipeline projects approved in 2012. By the end of the year, Spectra Energy anticipates completion of the Philadelphia Lateral Project through Delaware County. That line has the potential to move more than 20 Mcf (thousand cubic feet) of natural gas a day through the Northeast. The Kinder Morgan Energy Partners Tennessee 300 Line Expansion Project and Upgrade, scheduled for completion in November 2013, will add 40 miles of pipe between Pennsylvania and New Jersey, with the capacity to transport 636,000 dekatherms of natural gas a day. The Nation Fuel Gas Supply Corporation Line N Expansion Project will add five miles of pipe through Washington County, with an anticipated completion of November 2012.

The Shale reporter goes on, “The boom of hydraulic fracturing in the Northeast has created a glut of natural gas that market analysts anticipate will worsen because of new pipeline projects and another mild winter. Natural gas prices could hit a low of $2 per million Btu, according to leading energy analyst Phil Flynn of the Chicago-based Price Futures Group. Flynn anticipates increased deliveries from new pipelines that could help link up about 1,000 uncompleted Marcellus shale wells and bring them online. Last week, the natural gas price remained steady at $3.21 per million British thermal units, and the Energy Information Agency was reporting an 8 percent increase in natural gas storage from a year ago. Flynn said Thursday that he would stand by his $2 prediction, “assuming we don’t get a colder-than-normal winter.” He pointed out that the National Oceanic and Atmospheric Administration had just released its three-month weather report that predicts above-normal temperatures for the Midwest and Northeast from December through February. “Based on what we see with supplies being 8 percent above the average and at a record high, we should see (gas) prices come back down,” Flynn said. The biggest contributing factors, he said, are new pipelines and the non-producing wells these pipelines will make accessible for natural gas extraction.

According to the EIA, “there are over 1,000 natural gas wells that have been drilled in northern Pennsylvania but which are not yet producing natural gas because there is not enough interstate and gathering pipeline infrastructure to accommodate the new production.” New pipelines, such asInergy Midstream’s Marc 1 pipeline project that runs 39 miles through Pennsylvania’s Bradford, Sullivan and Lycoming counties, are set for completion by year’s end.

In an email, Inergy responded to Flynn’s prediction: “New pipelines like Inergy’s MARC I will benefit Marcellus producers by helping them move their gas to demand markets. By providing greater market access, new pipeline infrastructure can offer Marcellus producers alternatives to curtailing production when natural gas prices are low.” Even if the pipelines allow many of the currently non-producing Marcellus shale wells to be tapped, there is no certainty on the production or rate of decline for each well, which can vary considerably.

“In the end,” Inergy wrote, ”the market determines how much Marcellus shale gas is produced, not the pipelines that link supply regions and demand centers.” Predicting the future of natural gas prices, although much like predicting the weather, is not nearly as easy as looking out the window.

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Phil Flynn