As I expected Nat Gas futures lost their upside momentum and spent all of yesterday's session in negative territory in spite of the inventory withdrawal (see below for a more detailed discussion on inventories) coming in at a normal level for the first time during the winter heating season. Unfortunately for the bulls and bottom pickers yesterday's bullish inventory report could be the last bullish report for the foreseeable future as the latest NOAA weather forecasts is still bearish. Both the six to ten day and eight to fourteen day forecasts are projecting very warm temperatures and un-winter like weather over just about all of the US until at least February 9th and more than likely even longer. Inventory withdrawals going forward are going to consistently underperform (basis the weather projections) thus resulting in the end of the winter heating season total inventory level coming in at record highs for that time of the year (end of March) as compared to last year and the five year average.

Although as you will see below I am keeping my view at neutral for today my bias is quickly moving back toward selling mode and building a short position once again. Today is likely to be another day of the market digesting yesterday's inventory report along with working in the evolving warm weather projections into the mix. In addition the Feb Nymex Nat Gas futures contract expires today. I do believe when the dust settles and we head into a new trading week the market is going to be moving back into a sell the rally mode with the short covering rally completely over. The only caveat to my view is any unexpected announcements by other producers like Chesapeake to shut in dry gas production. Certainly that type of announcement could result in another pass at short covering.

Yesterday's EIA report was bullish as the EIA report had a net withdrawal (192 BCF) above the market consensus...as well as coming in above last year and the five year average for the same week. The net withdrawal was above the consensus projection for a withdrawal of 172 BCF. However, the market participants did not react in a bullish way to the news as a bullish report was mostly built into the market from early week projections. The most significant point of the report is the fact that it was the first report in months that did not result in the year over year and five year surplus building. The surplus narrowed versus both last year and the more normal five year average also. However, the current inventory level is still 547 BCF above the five year average. width=630 This week's 192 BCF net withdrawal is above last year's withdrawal of 184 BCF and greater than the withdrawal level for the five year average of 173 BCF for the same week. Working gas in storage was 3,098 Bcf as of Friday, January 20, 2012, according to EIA estimates. This represents a net decline of 192 Bcf from the previous week. Stocks were 531 Bcf higher than last year at this time and 547 Bcf above the 5-year average of 2,551 Bcf. In the East Region, stocks were 202 Bcf above the 5-year average following net withdrawals of 122 Bcf. Stocks in the Producing Region were 284 Bcf above the 5-year average of 837 Bcf after a net withdrawal of 43 Bcf. Stocks in the West Region were 61 Bcf above the 5-year average after a net drawdown of 27 Bcf. At 3,098 Bcf, total working gas is above the 5-year historical range.

Stocks declined in all three regions with the largest net withdrawal coming in the east (coldest part of the country during the report period). Even with a modest withdrawal stocks in the East region are still well above the 5-year average level & the surplus has been widening for the past month or so in all three regions.

The Producing Region saw a net decrease of 43 Bcf, while the East Region withdrew 122 Bcf. The West Coast drew 27 BCF. The East Region is still above the five year average. The Producing Region, with 1121 Bcf of working gas in storage, remains above the five-year average and above last year's level for the same week.

The surplus in total stocks versus last year narrowed slightly to a surplus of 531 BCF or 20.7% above last year. All regions are still showing a surplus versus the five year average. Compared to the five year average for the same week the total stock level surplus narrowed a tad to 547 BCF and sits at plus 21.4% above the same week for the five year average.

The following chart shows the difference between current total Nat Gas inventories compared to last year and the five year average. The direction has been a growing surplus in inventory since the end of August. This week was the first week in a long time that the surplus did not grow. As compared to last year total inventories are still showing a significant surplus of 531 BCF today and it is the middle of the winter! Just look at the difference from last year when stocks were steadily declining versus the previous year while this year they are steadily growing versus last year. width=630 As the week comes to a close the oil complex is still holding onto modest gains for the week for a variety of reasons. The external factors have been the main contributors for the gains in oil prices on the week with equities adding value while the euro has held firm as the US dollar weakened. On top of the external factors the evolving situation in Iran has continued to add a bit of a geopolitical risk to the equation. That all said WTI is higher by a little about $1.15/bbl on the week while Brent is up about $0.79/bbl (as of this writing). Surprisingly the Brent/WTI spread has actually depreciated in value even after the EU passed its embargo of Iranian crude oil purchases.

The Brent/WTI spread is telling in the way it has traded this week as it reflects a view that the market does not think there will be any supply disruption associated with the embargo of Iranian crude oil. If market participants thought there would be a shortfall or interruption in supply the spread would have widened significantly on the week. The way the spread is trading certainly supports the analysis and view I have been presenting for weeks that the EU embargo is likely to only be a logistics exercise with EU purchased Iranian crude going to Asia (China in particular) and Asian light sour barrels that were earmarked for Asia heading to Europe with Saudi Arabia and other GCC members standing by to make up any shortfall (which I do not expect there to be any).

So far Iran has not acted on any of the rhetoric it has been spewing for the last month as the US Naval fleet is once again back in the Straits of Hormuz area. In fact the rhetoric was much more conciliatory as just yesterday Iranian President Armadinejad said Iran is ready for talks with the West but the new sanctions will not force it to give in to demands to cease its nuclear operations. Whether or not the meeting get revived is still too early to tell for sure but yesterday's comments are an improvements over previous comments that kept flowing saying they would close the Straits of Hormuz (which I still do not believe they will attempt to do).

We have to watch Iran over the weekend when the Iranian Parliament is in session with some movement to react to the EU embargo by cutting off supplies immediately to those countries that will embargo Iran. Remember the EU embargo phases in over six months or so. I do not expect that to happen simply because the economic impact on Iran will be too great. Just as Europe needs to work out the logistics of replacement oil purchases Iran has to work out the logistics of replacement oil sales. That said it is a short term risk that could result in a short term imbalance if it does happen. Although I would suspect the IEA would immediately release oil from the Strategic Petroleum Reserve to solve the short term imbalance.

Moving back to the external factors the single biggest change this week was the outcome of the US Federal Reserve FOMC meeting when the Fed announced that they were keeping short term interest rates low (near zero) until 2014 or a year longer than what was previously announced... a sign that the US economy is not growing at a strong enough rate and a sign that the Fed will maintain an accommodative monetary policy for years into the future. Chairman Bernanke in his press conference after the FOMC meeting suggested that the Fed will have to do more and left the market with the view that another round of quantitative easing may be in the cards sooner than later especially if the economy does not start to expand more rapidly or in fact slow further from current growth rates.

Any new form of QE will be inflationary and likely result in a lower US dollar value, higher oil and commodity prices and possibly higher equity values. The first round of QE in the US resulted in risk asset market values responding as previously described. QE2 experienced the reaction but for a shorter period of time and relatively muted. Since the FOMC meeting the market has reacted mildly with most risk asset markets still a tad higher. Whether or not there will even be a QE3 is yet to be determined and if there is one it may not have as deep an impact on risk asset markets as QE1. That said with the backdrop that it could happen we once again have a bit of a Bernanke put in the market which should result in preventing any major sell-off in asset values. The possibility for another round of QE by the US does not mean there will not be a downside correction in risk asset markets but I would not expect any huge downside move like we have seen from time to time over the last several years.

The direction of the US dollar & euro has mostly been driven by the evolving debt situation in Europe. Certainly as discussed above the US dollar is now also being impacted by the possibility of a new round of quantitative easing by the US at some point in time in the future. So far this year Europe has moved marginally into the background and has not been a major negative on a daily basis as it was for major stretches during 2011. That said all is still not fine in Europe. Many of the same debt issue that have been evolving for the last three years are still evolving but progress (slow as it seems) is being made.

Progress or at least the perception of progress is the reason the market has lowered its event risk view of Europe and thus has contributed to the current bottoming of the euro. From a technical perspective the euro seems to have bottomed earlier in the year and has been in a modest uptrend since hitting a low on Jan 17th. A couple of weeks certainly does not mean the euro is now in a long term uptrend. Rather we can only say at this stage of the technical pattern that the market has been in a strong short covering rally as the market sentiment is slowly starting to change with a small amount of fresh buying starting to emerge. This pattern has contributed to the gains in equities and commodities. To the extent that the uptrend continues any downside correction in equities (as discussed above) and commodities should be somewhat shallow and short in duration.

From a fundamental perspective the euro is still facing major hurdles with Greece in the headlines almost every day over the last week as bond holders continue with their negotiations as to the size of the haircut they are going to have to take to avoid a complete default. It seems they are close to an agreement as talks continue and are expected to continue over the weekend. The market is slowly starting to build in a positive outcome but as we have seen with various situations in Europe related to the sovereign debt issues outcomes that are perceived often time do not happen.

I am keeping my view and bias at neutral as the short covering rally seems to come to an abrupt halt yesterday as this market has also run out of steam. 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. The WTI market remains above support but is stuck in a tight trading range at the moment. the momentum has also changed and starting to look toppy once again. However, I am still keeping my view at neutral. I am currently expecting intermediate support around the $97.60/bbl area basis WTI and $109.50/bbl level for Brent with resistance around the $104/bbl level for WTI and $113.75/bbl for Brent.

Currently markets are higher as shown in the following table below . Best regards, Dominick A. Chirichella dchirichella@mailaec.com Follow my intraday comments on Twitter @dacenergy