Today will be a light day of trading in the US as it is Martin Luther King Day. Electronic trading on Globex closes at 1 PM EST today and reopens at 6 PM EST. The floor trading session is closed all day.

Last week ended in day that was dominated by Europe. First the normal rumors began that several European countries were going to be downgraded. However, this time the rumors actually turned into fact as S&P downgraded the bond ratings of nine EU countries. As the news permeated around the market there was a strong sell-off in just about every risk asset class based mostly on the rumors. As the facts began to hit the media airwaves the selling slowed and markets closed well off of their lows for the session. Friday turned out to be a sell the rumor, buy the fact kind of trading session.

Asian and European trading has been mostly quiet ss many participants still digest the ramifications of Friday's downgrades while they look at what is on this week's horizon. The ECB was seen buying Italian debt today and that eased the negativity engulfing Europe and the euro as well. In fact so far the euro has regained all of its losses for the session and is currently trading about unchanged. From a macro trading perspective global equity and commodity markets have remained tightly linked to the direction of the euro. As such US equity futures have recovered most of their early losses with oil now solidly in positive territory on a combination of a stabilizing of the euro as well as the evolving geopolitical situations in both Iran and Nigeria.

Iran continues to spew out rhetoric about closing the Straits of Hormuz but you all know my view that this is highly unlikely and even if they attempted such an act the US and Allied military assets in the area would stop it pretty quickly. I expect the rhetoric to continue well into the future and thus act as a floor in oil prices as a minimum.

On the other hand there is a more realistic possibility of a supply disruption of Nigerian crude oil due to a growing strikes in the country by most all workers over the removal of the fuel subsidy several weeks ago. So far negotiations are continuing with the Nigerian President but no deal has yet been struck. The Oil Workers Union...Pengassan said it will only shut oil output as a last resort and are currently willing to give the negations more time to evolve. As I have cautioned since early last week this situation is one to watch very closely over the next few days as it could cause a short term disruption if negotiations completely break-down. So far oil is still flowing normally.

On the news wires this morning in a CNN interview the Saudi's have indicated they want oil prices stable around the $100/bbl level. The Saudi Oil minister said that they could increase oil production by about 2 million bpd almost immediately from current levels...in a few days. In my opinion I would interpret the Saudi's elaboration of their capabilities and target oil price as a passive message back to Iran who said over the weekend that Saudi Arabia and other GCC producers should not increase production to replace lost Iranian oil. So the war of words ratchets up as the EU nears their vote on Jan 23rd to approve (or not) an EU embargo of Iranian crude oil purchases for Europe to be phased in over a six month period of time. You also know my view on this subject... an embargo will result in a logistics exercise and any lost oil (if any) would be made up by Saudi Arabia and other GCC members irrespective of the veiled threats coming from Iran.

So far this week is starting out on a quiet note with modest gains in oil prices after last week's loss in the oil complex. The equity markets ended modestly higher even as the US dollar remained firm throughout the week. As the situation in Europe unfolded and by the time the end of the week arrived most all risk asset markets were still able to end the week in positive territory but not at the highs from earlier in the week. Last week was mostly about Europe and less about the positives coming from the US while the war of words between the west and Iran ratcheted up a notch. The action and volatility last week was in all of the oil and commodity markets as well as the global equity markets. Last week was all about market players acting around the cloud of uncertainty that seemed to marginally shrink for some (equities) risk asset markets. Equity bourses were higher even as uncertainty started to increase at the end of the week. Precious metals increased modestly even as the US dollar firmed on the week as cash moved into the safe haven of the US dollar and out of the euro. Over the last week the oil complex was lower across the board with WTI the biggest loser in the complex. The Feb WTI contract decreased about 2.82% or $2.86/bbl. The Feb Brent contract ended the week with a slightly smaller loss of 2.32% or $2.62/bbl. The Feb Brent/WTI spread moved higher by about unchanged ad range bound for most of last week.

On the distillate fuel front the Nymex HO contract decreased as distillate fuel inventories increased more than expected and US distillate fuel exports were flat on the week. The spot Nymex HO contract decreased by 1.4% or $0.0430/gal. Gasoline prices decreased on the week as gasoline stocks also increased strongly and much more that the expectations. The spot Nymex gasoline price decreased by .57% or $0.0157/gal this past week.

On the week Nat Gas futures were pummeled once again as the winter has still not arrived in most regions of the US. Nat Gas futures declined by 12.8% or $0.392/mmbtu. Nat Gas made a valiant effort several times last week in trying to put together a short covering rally. Unfortunately for the bottom pickers it failed around the $2.72/mmbtu level or the new 2009 resistance level breached yesterday. In the end Nat Gas made another new intraday life of contract low with the shorts seemingly heading home for the long weekend still comfortable with their positions. As I have discussed on many occasions all of the normal price drivers for the Nat Gas complex remain biased to the bearish side with the sole exception of the fact that the market is starting to get a bit oversold and may be due for a short covering rally at some point. Of interest Nat Gas futures made yet another new life of contract low this morning and is down another 4.2% already.

The market is still not completely oversold...as least measured by the commonly followed RSI indicator which is around 25 for the 10 day RSI. Normally the market is considered oversold when the indicator drops below the 20 mark. So we are not yet there but as with most indicators none of them are perfect nor always correct. Rather they are a guide to incorporate in ones overall trading models.

Also I should point out that when markets are in a strong trend (as Nat Gas is) oversold indicators like the RSI can remain in an oversold state for a sustained period of time. That said a short covering rally will occur when it is least expected. The magnitude of the rally will be dependent on what triggered the rally. If it is a result of the advent of very cold weather projected for an extended period of time the rally could be very strong and likely send prices back to a test of the $3.05/mmbtu resistance level. If is only due to sellers starting to dry up then the rally will be modest and likely only test the $2.85/mmbtu level. It is time to get on the short covering rally watch.

Predicting when short covering rallies will occur and what the magnitude of them will be is far from an exact science. The bottom pickers have been predicting and actually setting up positions since the price was in the low $3's looking for a rally to hit. They are still looking. For the moment the market remains in a downtrend and will remain in that mode until proven otherwise. Wait for the market to signal that it is turning.

On the financial front equity markets around the world ended decidedly higher. Fear of contagion coming from the southern EU member countries... is still a huge concern in the financial markets but did ease a tad as the week progressed (except on Friday with the S&P downgrades). Global equity values increased as shown in the EMI Global Equity Index table below. The EMI Index gained 1.3% on the week. Over the last week the Index held most of its gains even though the euro declined strongly and the US dollar has inched higher(moves in this direction would normally result in modest moves to the downside in equities..not this time). Last week the global equity markets were a positive driver for oil and most commodity prices.

The WTI market remains above support but has failed to break out of the upper end of the trading range since peaking over the last week or so. As such I am moving my view back to neutral as I wait and see how the market settles into the trading range that has been in place since last November. I am currently expecting intermediate support around the $98 to $98.25/bbl area. I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster a sustained upside rally absent some very cold weather for an extended period of time. If the winter weather does not arrive over the next few weeks I would not be the least bit surprised to see the spot Nat Gas futures contract continue trading with a $2 handle.

Currently as a new day of trading gets underway in the US markets are mixed.

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