The markets continued to be overwhelmed by the potential for contagion and a collapse of the EU. The sovereign debt issues have increased the size of the cloud of uncertainty over all of the risk asset markets as the selling continued through yesterday's session. So far this morning oil and US equity futures are rebounding slightly but the market sentiment clearly remain in negative territory. I must admit I thought Europe would have started to move into the background by now especially with new governments now in place in both Greece and Italy and austerity programs approved for the new administrations to start to implement and thus be eligible for the next batch of bailout funds. So far Europe as remained front and center and is still the main price driver for all markets.

So far this morning the ECB has been buying both Italian and Spanish bonds resulting in bond values rising (interest rates declining a tad) and the very short term negative market sentiment easing a bit. The result has been a small increase in equity futures in the US and a stabilizing of equities in Europe as the euro has firmed and oil prices have increased. However, with the EU still facing huge issues the French and German governments have once again renewed and elevated their disagreements on how to solve the debt issues. I just don't understand how Merkel and Sarkozy can continue to play games this late in the evolution of the problems in the EU. It serves no purpose and if they truly believe the EU problems are solvable they need to quickly come to an agreement. Another viewpoint may say they do not believe the problems are solvable and as such the disagreements are just a roundabout way of indicating that alternative view. Only time will tell!.

While the bickering continues in Europe the global equity markets have been under pressure all week as shown in the EMI Global Equity Index table below. The Index is now down 2.5% for the week after declining another 2% over the last twenty four hours. All of the ten bourses in the Index declined over the last day suggesting that the market is still discounting a successful resolution to the problems in Europe. The US Dow barely remains in positive territory for the year with eight of the ten bourses now back to showing double digit losses. The year to date loss widened to 15.4% and is now back to about where it was prior to the announcement of the Merkel/Sarkozy plan on October 26th. As far as the way the equity markets are trading and in spite of the progress made in both Italy and Greece they view everything back to being at square one or as if the plan never came to be.
WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals I am still keeping my view and bias at cautiously bullish even as the cloud of uncertainty remains in Europe. The situation in the EU is still in turmoil but progress seems to be slowly emerging even though the market has not acknowledged it. That said WTI & Brent are once again back to being in sync with the direction of the US dollar and euro and moving tick for tick with those markets at the moment.
I am still bearish but a bit less convinced that there is a significant amount of downside in the price of Nat Gas in the short term. Right now I would categorize the current market action as a market with a downside bias. I am keeping my view and bias at bearish as I watch how price activity plays out over the next several trading session.

As I cautioned yesterday today's EIA inventory report came in below the expectations and resulted in a modest level of short covering through most of the session. The market viewed the outcome...a build of 19 BCF as a positive resulting in an immediate pop in futures prices. However after about an hour prices declined giving back all of the increase associated with the injection number. However, as the day progressed prices bottomed around the unchanged level and slowly moved higher recovering about half of the post inventory price gain and settled around that level.

Aside from today's injection report all of the other price drivers remained the same. The latest weather forecast from NOAA is largely unchanged calling for above normal temperatures for most of the US for the rest of November. This is likely to result in at least two more weeks of injections with new all time record inventory levels set with each new injection. The fundamentals remain bearish and the upcoming winter is expected to be within the range of last year possibly about 2% warmer according the last winter outlook forecast by NOAA issued late October. Of interest a new industry poll conducted by Reuters showed participants are expecting end of winter inventories to end at the highest level in 21 years coming in around 1,864 TCF. That certainly does not sound like a very bullish viewpoint from a sampling of industry participants.

I remain mostly bearish and I am expecting a possibility of one more push lower dropping prices possibly another 5 to 10% before starting to stabilize and forming a bottom. The fact that everything remains bearish and today's inventory level (see below for more details) is a new all time record high and the market held up relatively well is starting to suggest to me that there is quickly becoming an absence of sellers. The risk/reward of entering into a new short position is slowly more toward a bias on the risk side of the equation and that is what I view as the main reason why the market is holding up. From a technical perspective with prices falling over the last several weeks both volume and open interest for the spot futures contract have been declining also suggesting that there is dwindling conviction from the sell side of the equation. Time to raise the caution flag for the short side specs and strongly recommend using tight, trailing stops as we may be getting closer to that consolidation pattern than I have originally thought and mentioned above.

Currently as a new day of trading gets underway in the US markets are marginally higher as shown in the following table.

Best regards,
Dominick A. Chirichella
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