The interesting change since I issued Monday's newsletter is the change in the weather forecast from NOAA for both the six to ten day and eight to fourteen day forecasts compared to the ones issued over the weekend. The latest forecast s once again projecting above normal temperatures for the vast majority of the eastern half of the US from February 12th through February 20th with below normal temperatures along the western portion of the US. Even with a more bearish weather forecast Nat GAs futures prices have been able to hold onto yesterday's small gains.

As I have been discussing from a technical perspective the market remains oversold and additional rounds of short covering rallies are certainly very likely. That said unless there is a significant over performance of inventory withdrawals I still do not think the futures market will move outside the boundaries of the current $2.25/mmbtu to $2.85/mmbtu trading range that it has been in since earlier in the year. Barring any major announcement of significant production cutbacks I am still expecting the futures market to trade with a $1/handle sometime during the upcoming shoulder season.

This week the EIA will release the weekly Nat Gas inventory report on its regularly scheduled day and time...Thursday, February 9th. This week I am projecting a net withdrawal of 93 BCF which is significantly below both last year and the five year average for the same week. My projection for this week is based on a week that experienced unseasonably mild weather over a major portion of the country as shown in the following table. My withdrawal forecast is based on the fact that heating related demand was below normal last week in most parts of the country. My projection will be below last year's net withdrawal level of 206 BCF and below the normal five year average net withdrawal for the same week of 191 BCF. Bottom line the inventory surplus will build again in this report period with the surplus versus history coming in around 700 BCF. If the actual EIA data is in line with my projections the year over year surplus will widen to around 688 BCF. The surplus versus the five year average for the same week will widen to around 699 BCF. This will be a bearish weekly fundamental snapshot if the actual data is in line with my projection. The industry is projecting a new withdrawal of 85 to about 110 with the early consensus forming around a withdrawal of about 95 BCF.

The oil complex is very much back to two different worlds as WTI continues to drift lower while Brent remains firm amidst the evolving geopolitical events in the Middle East. The Brent/WTI spread has blown out over the last several trading sessions with the spread currently trading close to $20/bbl premium Brent over WTI. Brent is being driven by what is going on with Iran and the potential for an interruption of supply of Iranian crude oil to Europe coupled with a return of winter with a vengeance in parts of Europe which is quickly increasing the demand for gasoil. On the other hand the view that both PADD 2 and Cushing crude oil stocks are likely to grow back to a surplus condition is putting pressure on WTI.

In addition the external price drivers...direction of the euro & USD and equity markets are impacting the direction of WTI and not so much Brent. Oil has a different face depending on what commodity in the oil complex one looks at. For the moment all that is bullish is being reflected in Brent which is carrying over to both the Nymex HO and RBOB contracts while all that is bearish is being reflected in WTI which is not carrying over to the other commodities in the complex. The market is complicated with all of the major price drivers impacting some part of the oil complex.

In the Middle East Iran's parliament said they are ready to embargo oil exports to various European countries as a proactive response to the Europeans banning crude oil purchases from Iran by July, 2012. The difference with the Iranian ban is it is immediate meaning that the EU countries like Italy and Greece in particular will have to re-optimize their refining systems with non-Iranian crude oil sooner than later. I still view this as a logistics exercise and not one that will result in any significant shortage of oil for the European system...or elsewhere for that matter. If it does the IEA will simply and quickly release oil from the vast Strategic Petroleum Reserve. That said the market is continuing to add to the risk premium in the price of oil (mostly Brent as discussed above) in anticipation that the embargoes from both sides will result in some interruption in the supply of oil...in my view I do not expect that to happen.

On the bearish side of the equation there is still no debt deal coming out of Greece even as many thought this would have been all packaged up last week. The lack of a deal has moved the sovereign debt issues of the EU back into the forefront and is keeping the euro under pressure (firmer US dollar) as well as starting to impact the strong upside momentum that has been driving global equity prices higher since the beginning of the year. All of this is creating a bearish backdrop for oil and the broader commodity complex. However, as discussed above the bearishness is only spreading to WTI and not the rest of the oil complex. Not only is there still no deal in Greece but some of the major labor unions are orchestrating a strike in protest of what will likely to be further austerity measures that Greece will have to undertake in order to get the next tranche of bailout funds. The situation in Greece is still precarious at best with the potential for a default still a possibility...which is what is driving the negative sentiment throughout the currency and equity markets.

I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally. WTI is hovering around the intermediate support level while Brent remains in a slowly evolving uptrend. The momentum has changed and continuing to look toppy for WTI but not for Brent. However, I am still keeping my view at neutral (with a bias to the downside for WTI). I am currently expecting intermediate support around the $92.5/bbl area basis WTI and $109.50/bbl level for Brent with resistance around the $97/bbl level for WTI and $113.75/bbl for Brent.

Currently markets are mixed as shown in the following table.

Best regards, Dominick A. Chirichella dchirichella@mailaec.com Follow my intraday comments on Twitter @dacenergy