Big changes in Europe as Sarkozy loses the election and a more liberal socialist party takes over. This is yet another major change taking place in Europe and one that could result in more uncertainly entering the financial markets. The market in the west opened in Sunday evening trading from a negative viewpoint with most risk asset markets lower including oil. As of this morning most markets are still in negative territory but are trading well off of the lows made in early trading on Sunday night. The new French President Hollande and his party are the absolute opposition to the austerity programs that have been evolving in Europe and as such they will be in opposition to the German leadership who have been the core behind the push to the EU austerity programs and getting the economy in order. How this all evolves is still a huge question mark and one that is not going to be know in the next day or so. This is going to take place over months if not years as a change in the direction of the French economy is likely to take place. How it transcends to the rest of Europe is also an unknown.

For now the main known is uncertainty and markets do not like uncertainly. As such this change in Europe is yet another variable that is likely to create another level of volatility in all of the risk asset markets. If one views the change in France as one for more deficit spending on social programs as a policy of reviving the economy the markets may not view that as a very bullish signal and one that could result in the sovereign debt problems in Europe going in the wrong direction. For today and in the next several weeks we will have to see how the market digests these changes. But out of the gate they look bearish for most risk markets at the moment as most participants came out on Sunday night with nothing but sell orders although the strong selling has subsided.

On the week Nat Gas futures decreased on the week while remaining above the psychological $2/mmbtu level. The June Nat Gas futures contract lost 2.23% or $0.052/mmbtu on the week but is still solidly trading with a $2 handle. So far in overnight trading the spot Nat Gas futures contract has been able to recover all of last week's losses and a bit more in the midst of a lot of uncertainty associated with the political changes occurring Europe.

For the short term the Nat Gas market is starting to look like it is setting up to trade in a range of around $2.20 to $2.50/mmbtu. The coal to gas switching that has occurred is contributing to the Nat Gas weekly injections underperforming versus history and has been enough to stop the selling that has plagued this market for over a year. On the other side of the equation the view that producers have started to cut production (as per the EIA February report) and are likely to continue to cut production has contributed to the bullish side of the trading range. However, unless more significant cuts are announced the market will have limited upside for the next month or so.

I remain cautiously bullish and will so until proven wrong. I maintain positions in the upcoming winter heating months as well as a small long position in the front end of the market with very tight trailing stops. The strategy of buy dips down as long as the $2.20 to $2.25/mmbtu support area holds has worked several times over the last week or so. I also think it is time for Nat Gas end users to either start to build or add to their longer term hedge portfolios especially for the end of this year and into 2013. Using options strategies may be a good starting area as it does provide some risk protection in the event that this is a limited rally

This week the EIA will release the weekly Nat Gas inventory report on its regularly scheduled day and time...Thursday, May 10th. This week I am projecting the eight net injection into inventory of 33 BCF. My projection for this week is shown in the following table and is based on a week that experienced a considerable amount of colder than normal weather over major areas of the country with colder than normal conditions in the northeast. My injection forecast is based on the fact that some heating related demand occurred last week. My projection compares to last year's net injection level of 71 BCF and the normal five year average net injection for the same week of 84 BCF. Bottom line the inventory surplus will narrow again this week versus last year and the five year average if the actual data is in sync with my projections
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 802 BCF. The surplus versus the five year average for the same week will narrow to around 806 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections and consensus are still forming.

I am keeping my view at neutral and keeping my bias also at neutral with an eye toward the upside. The surplus is still building in inventory versus both last year and the five year average and could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
I am moving my view to cautiously bearish after oil broke down on all fronts last week with a continuation to the downside to open trading for the week. Oil is now solidly below the trading range it has been in for the last month or so and well below several key support areas. WTI is now solidly trading in double digits with Brent currently holding up a tad better.

Currently markets are mixed as shown in the following table.

Best regards,
Dominick A. Chirichella
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