With the market focusing on tomorrow's EIA inventory injection report prices rallied modestly on Tuesday only to retrace slightly in overnight trading so far. The market is mostly focused on what is likely to be an underperformance in the weekly injection level (see below for a more a detailed discussion) while somewhat discounting the less than supportive short term weather forecasts. Although the injection level this week is likely to be below the so called normal five year average for the same week it will still come in well above last year resulting in the year over year deficit narrowing one again.

The latest NOAA six to ten day and eight to fourteen day forecasts show the western region of the country to remain under a warming trend while the rest of the country experiences normal to below normal temperatures through the first week of August. Overall the latest forecasts suggest that the call on Nat Gas for weather related demand for power generation is likely to be below normal for this time of the year. As such it will likely result in the weekly injection level moving back into an over performance pattern versus the historical data and thus a further narrowing of the year over year deficit.

There is a new Tropical Depression number 4 located several hundred miles south- southeast of the Cape Verde islands. Currently this pattern is projected to move west- northwest at about 20 MPH. It is projected to strengthen into a tropical storm and should be in the vicinity of the Caribbean island early next week. It is still too early to determine if this weather event will turn out to be something to be concerned about insofar as oil and Nat Gas producing operations in the US Gulf Coast. For now we will keep it on our radar.

This week the EIA will release its inventory on Thursday, July 25th at 10:30 am. This week I am projecting the second underperformance of the injection level of 50 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced some above normal temperatures during the report period. My projection compares to last year's net injection of 26 BCF and the normal five year net injection for the same week of 53 BCF. Bottom line the inventory deficit will narrow this week versus last year but slightly widen versus the so called more normal five year average if the actual numbers are in sync with my projections. This week's net injection will be slightly bullish when compared to the historical data.

If the actual EIA data is in line with my projections the year over year deficit will come in at about 390 BCF. The deficit versus the five year average for the same week will widen to around 37 BCF. The early market consensus is projecting the eleventh injection of the season in the range of 45 BCF to 65 BCF with the consensus still forming.

Oil prices are mixed in overnight trading after a supportive API oil inventory report that has been offset by yet another sign that the main economic and oil demand growth engine of the world… China is slowing. The latest manufacturing data out of China weakened more than expected for July. The HSBC/Markit reading came in at 47.7 or solidly below the expansion threshold of 50. The PMI data is an energy sensitive Index and with China in the contraction mode it certainly suggests that oil demand growth out of China is likely to be less than has been forecast so far.

On the other side of the world the Eurozone manufacturing index actually came in better than expected for July led by strong growth out of Germany. For the first time in two years the Index came in at 50.1 or above the expansion threshold and above the 48.8 level from June. This could be an early sign that the EU economy may finally be starting to bottom and beginning to work its way out of recession.

The Brent/WTI spread is back on the defensive so far this morning after a modest short covering rally over the last day or so. The spot September spread has narrowed to a $70/bbl premium of Brent over WTI after trading well over the $1.50/bbl level yesterday. Last night's API data showed another large draw of 2.1 million barrels from Cushing strongly suggesting that the destocking pattern that has been in play for the last month or so is likely to continue. Cushing stocks are still above normal but now stand at the lowest level of the year.

I view the activity over the last few days as primarily a short covering rally and not yet a structural change in the narrowing trend of the spread that has been in play since February of this year. The spread has already hit parity and actually traded with WTI at a premium to Brent on an intraday basis on both Friday and Monday. I expect the narrowing trend to remain in place.

Global equity markets have added slightly to the gains of the week in overnight trading so far. The EMI Global Equity index gained another 0.28 percent narrowing the year to date loss to 2.7 percent. The Index is back to levels not seen since late May/early June. The bourses with very accommodative monetary policies and quantitative easing programs in play remain the best performers in the Index with Japan still holding the top spot. On the other hand Brazil, China and Hong Kong remain in the loser's column with Brazil still showing the largest year to date loss. Equities have been a mostly positive price driver for the oil complex and broader commodity markets so far this week.

I am maintaining my Nat Gas view at neutral and bias at neutral based on a less supportive short term temperature forecast. The fundamental picture could begin to shift if the temperatures do not remain above normal on both coasts.

I remain cautiously bullish for the overall oil complex. The overall oil fundamental picture is has been improving over the last several weeks and along with the changing view of how long QE3 may or may not last in the US is providing support to the oil complex on a macro basis.

Markets are mixed as shown in the following table.

Best regards,
Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy

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