Tropical Storm Debbie in the Gulf of Mexico looked much more threatening to oil and Nat Gas production on Friday which contributed to the short covering rally in both of these commodity classes. However, over the weekend the storm changed its path (as tropical storms often do) and is now on a path toward the east and away from the oil and Nat Gas rich producing region of the Gulf. TS Debbie is currently projected to remain a TS and make landfall around the Florida - Alabama border. At the moment this early tropical event is not going to have much if any impact on oil or Nat Gas production. Of note next week's inventory reports (July 5th) will likely show a reduction in oil imports due to LOOP closure and possibly a minor reduction in oil and gas production. However, it should still remain on the radar in the event that the path makes a sudden change west.

With TS Debbie moving into the background traders and investors are once again focused on the main headwinds that have been impacting oil and most all risk asset values for the last month or so. Many of the major events for the month of June have come and gone and overall they were all bearish for the risk asset markets. The last big event of the month will be the EU Ministers meeting on June 28/29 which so far is not providing any pre-meeting support for the markets even after the big four EU country leaders meet late last week and indicated they were leaning toward about $160 billion stimulus or growth program. A stimulus program aside the major issues facing the EU continues to be the evolving sovereign debt issues in Greece, Spain, Italy and other areas. Debt problems have been plaguing the EU for almost three years with many Minister's meetings already in the history books with no long lasting solution as the problems have actually intensified even more over time. The stage is set once again with Germany (the country with the most money and in the best condition in the EU) on the opposite side of the fence from the more socialist approaches set forth by France, Spain and Italy.

The way the markets are already trading today and with the euro now below another critical technical support level of 1.2550 traders and investors are currently placing a vote of no confidence that the EU leaders will be successful at the end of the week summit. In fact as it looks right now the euro is likely to retest the lows made on June 1 of around 1.23 and if solidly breached the next level of support is not until the 1.185 to 1.19 level made in the middle of 2010. Unless the 30 second news snippets hitting the media airwaves start to look like the EU leaders are on the cusp of a solution I would expect the 1.23 level to be tested this week. If the meeting turns out to be just another kicking of the can down the road outcome the June 2010 levels could be tested sooner than later.

What goes down must also come up. A falling euro will continue to support a rising US dollar as cash coming out of asset markets continue to flow to the US dollar. A rising US dollar should result in one major positive for the global economy...falling oil and commodity prices. As long as oil and commodity prices continue to drift lower the cost of doing business in the consuming world is also going down. Consumers around the world will eventually pay lower values for commodity based goods and services and should have more funds for paying down consumer debt, spending on non-discretionary items or simply increasing their savings. Eventually lower commodity prices should contribute to an improvement in the global GDP if values remain low for a extended period of time.

Also contributing to the overnight selling in the oil complex is an article over the weekend in the New York Times suggesting that much of the data out of China is likely overstated. I am not sure why this is a big revelation to the market as this has been a concern with data out of China and many emerging market countries for years. However, the main economic and energy growth engine of the world may be slowing even faster than the data is suggesting. If that is the case it is certainly another bearish data point for oil and the broader commodity complex. If China's oil demand growth is slowing it simply makes the global supply and demand balance even more biased to the oversupply side. Likely a contributing reason why the three main market crude...WTI, Brent and Dubai are all back in a contango.

Technically the spot WTI contract is struggling to get back above the $80/bbl level and is now in the third trading session in a row with the majority of trading taking place below $80/bbl. The next major level of technical support is around $75/bbl hit back in early October of 2011. Barring any major bullish turn of events the probability of testing that level is increasing. Brent has now been trading below its last support level of around $95/bbl for the last four trading sessions in a row. The next major support level for the spot Bent contract is in the $82 to $83/bbl area. Much like WTI barring any bullish news the likelihood of lower prices for both of these commodities from a technical perspective is increasing.

The big wild cards at the moment that could have an impact on the direction of oil prices that we all need to watch very closely is OPEC/Saudi Arabian production levels and action by the US Fed and other major central banks in cranking up the money printing presses. I am not certain that Saudi Arabia and some of its close allies within OPEC are going to be ready to cut production in the very short term. I still believe that one of the main reasons why the Saudi's are producing at the current high levels is to help the west to put pressure on Iran along with the sanctions placed by the west. With negotiations still continuing (technical meeting next week in Turkey) and the EU Iranian crude oil purchase embargo set to officially start on July 1 I view the lower price for oil as another contributor to keeping Iran at the negotiating table. I expect high OPEC/Saudi Arabian crude oil production levels to continue well into July...even if prices fall further from current levels.

The second variable out there is will the US Fed and/or other major central banks ramp up the printing presses and flood the world with a major quantitative easing program(s)? Certainly that would contribute to turning the current risk asset downtrend least for a period of time. However, I do not see the US doing anything until the August Fed meeting in Jackson Hole at the earliest and that is only if the employment situation deteriorates further from current levels. The UK has continued to ease as has Japan and China. The place to watch is will China get even more aggressive and lower short term interest rates even further and/or actually announce a large stimulus program if in fact their economy is slowing even faster as alluded to in the NYT article. OPEC and quantitative easing remain on the radar as potential trend changers.

Over the last week the oil complex was lower with the complex losing between 4 to almost 7% with Brent leading the way lower. The August WTI contract decreased by about 5.42% or $4.57/bbl. The August Brent contract ended the week with a decrease of 6.79% or $6.63/bbl. The August Brent/WTI narrowed by about $2.06/bbl for the week as the normalization process slowly continues. The combination of the market looking at the Seaway Pipeline now pumping oil out of Cushing to the US Gulf Coast and the easing of the tensions in the Middle East is enough to keep the spread bulls on the sidelines going forward. Barring any change in the current geopolitics of the Middle East I still expect the spread to gradually continue to narrow over the next 3 to 6 months as the surplus in the US mid-west continues to recede.
On the distillate fuel front the Nymex HO contract decreased by about 4.26% or $0.1128/gal on the week even as distillate fuel inventories increased modestly last week versus an expectations for a build in inventories. Gasoline prices decreased on the week after an expected build in gasoline stocks. The spot Nymex gasoline price decreased by 4.88% or $0.1318/gal this past week.

Nat Gas futures increased strongly on the week and closing above the trading range of $2.25 to $2.50/mmbtu. The July Nat Gas futures contract increased by 6.4% or $0.158/mmbtu on the week and is now trading around the key resistance area of $2.75/mmbtu.

With the first tropical weather pattern evolving in the greater Gulf of Mexico area the Nat Gas shorts were reminded of the exposure that could come with a storm. As such today's trading session was mostly about a short covering rally as the uncertainty that the weather pattern in the Gulf could turn into something that could eventually impact supply. This coupled with Thursday's bullish inventory report was enough to send the weak shorts to the sidelines. The current forecast from the National Hurricane Center expects this weather pattern to head east toward Florida and not into the oil and Nat Gas rich producing section of the Gulf of Mexico. It is just that time of the year when every potential tropical weather pattern will be looked at very closely by all market participants and those that form in the Gulf or head to the Gulf will generally have an impact on price as we saw today.

Technically the market is also breaking out to the upside and that has contributed to some new buying coming into the market. From a technical perspective the next upside target or resistance area would be a test of the $2.75/mmbtu high made a few weeks ago with support in the $2.50 to $2.55/mmbtu area. However, this is a market that is also impacted pretty strongly by what happens from the fundamental side of the equation with weather... both temperatures and tropics. At the moment I the current tropical weather pattern will not have any impact on short term supply as it does not look like this storm will hit the main part of the Gulf.

On the temperature front the mini heat wave that hit the Northeast will change over the weekend and a period of normal to below normal temperatures will be settling in. However, a major portion of the US will remain unseasonably hot which should result in some level of cooling demand on Nat Gas. However, I do not think the next several weeks will bring the same level of severely hot weather that was experienced last year and as such it could result in injections moving toward over performing history.

Most importantly the economics of coal to gas switching is becoming less favorable to Nat Gas on an almost daily basis. As of today the advantage has declined to around $0.08/mmbtu based on the Nymex spot Appalachian Coal price versus the Nymex spot Nat Gas futures price. Nat Gas is quickly approaching the point when utilities will start to look at the possibility of switching some of the Nat Gas back to coal for power generation if the current pattern continues as shown in the following chart. With Nat Gas inventories already at 73.3% of maximum workable capacity and the Producing region at 83.1% full the industry can't afford to lose any demand that has moved from the coal sector or else inventories will prematurely hit maximum capacity.

Bottom line I still view Nat Gas futures as limited to the upside and I do not expect a sustained rally above the current levels that will likely last for any length of time in the short to even medium term. As each week goes by the likelihood of hitting max capacity in inventory is increasing. I still expect the market to trade in a $2.25 to $2.50/$2.60 trading range for the foreseeable future with very short periods of time spent outside of the range on either end.

On the financial front equity markets around the world lost ground from the previous week. The financial markets were mostly impacted by all of the headwinds previously discussed. Global equity values decreased as shown in the EMI Global Equity Index table below back into positive territory for the year.
The EMI Index decreased by 0.7% on the week and is now back in negative territory for the year by 0.7%. Over the last week the Index decreased in value in most all of bourses with five bourses still in negative territory for the year and the overall Index now at the lowest level since December of last year. The euro lost ground on the week while the US dollar increased modestly. Last week the global equity markets were a bearish price driver for oil and most commodity markets. Last week was a risk off trading week for most risk asset markets.

The oil complex has broken down below the trading range it has been in for weeks and is now bearish with more downside still possible. WTI can now be categorized as being in a $75 to $85/bbl trading range with Brent setting up in a $83 to $95/bbl range. The outcome of all of the upcoming events I have been discussing in the newsletter over the last several weeks have been mostly bearish for oil prices while the vast majority of the macroeconomic data that has been released is also bearish for oil.
I am keeping my view at neutral to see if Nat Gas is able to hold onto the developing trading range. The surplus is still narrowing in inventory versus both last year and the five year average but 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.

Currently markets are mixed as shown in the following table.

Note: I am heading off to Europe for the next two weeks to teach several trading courses. As such my reports will be at non-normal hours and I may miss a few days.
Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.