Last week was all about Europe and this week is going to be pretty much the same. The big events of this week will be the plethora of pre-meetings between the leaders in Europe along with the actual ECB meeting on Thursday and the EU Summit on Friday. Along the way even Secretary of Treasury Geithner will be running around Europe meeting with many of the leaders to help encourage the Europeans to come up with a comprehensive solution. The first of the meetings take place today between Merkel and Sarkozy as they lay out their plans for the Summit on Friday. Irrespective of what else happens around the world... what happens in Europe will not stay in Europe as it will impact markets around the globe.

Merkel and Sarkozy seem to be heading in the direction of amending or changing the original EU Treaty to allow for more stringent oversight on budgets and thus spending in the member countries. Whether that approach will be enough to keep the candles of hope burning long enough is still a big question. In fact whatever they do finally come up with this week it will be the fifth plan they will have put in place and so far nothing much has changed.

On the other side of the fence the ECB will be meeting on Thursday and most are expecting a minimum of a 25 basis point reduction in short term interest rates with more and more market participants even expecting a 50 basis point move. The head of the ECB also indicated late last week that given the right plan from the EU leaders the ECB could ultimately do more to help. That sounds like a more aggressive bond buying program and possibly acting as the lender of last resort until a more comprehensive plan or solution is executed...especially if the plan involves changing the treaty.

Without a doubt the ebbs and flows coming out of Europe have been the main price driver for the oil complex as well as the broader commodity complex and will likely remain the main price catalyst. That said the evolving geopolitical situation in and around the middle east is also impacting oil prices if nothing other than acting as a put in the price of oil. As we discussed last week the US has placed new sanctions and the European are working on a new set of sanctions targeting the financial and energy sectors. The European sanctions could result in a European embargo on Iranian crude oil purchases which could finally begin to impact the Iranians as Europe as a region is in the top three lifters of Iranian oil. This part of the plan could be decided by the January meeting of the EU Ministers.

The rhetoric coming from Iran ratcheted up a notch over the weekend with the Iranians indicating that an embargo of Iranian oil would result in a pretty quick jump in prices to $250/bbl. Certainly I agree that prices would rise ...but not by that much and not for an extended period of time as any lost Iranian oil that is currently being supplied to Europe will be replaced by some combination of oil from Saudi Arabia (very similar quality) and from the vast Strategic Petroleum Reserves in IEA countries. This story is far from over and it is one that will continue to remain in the oil price mix for the foreseeable future.

So far this week is starting out on a positive tone and continuing where the markets left off last week...still in an upside recovery mode. There is a lot of ground to recover even after last week's strong gains in most risk asset markets especially on the equity front. Last week ended on a totally positive note as shown in the EMI Weekly Price Board table below. As the situation in Europe unfolded by the time the end of the week arrived most all risk asset markets were strongly higher on the week. Last week was all about Europe as discussed above as another new proposal by Merkel and Sarkozy... or at least a minor ray of optimism remains center stage to start the week. 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 began to recede a bit in all risk asset markets. Equity bourses were higher as uncertainty started to decrease by the end of the week. Precious metals increased modestly even as the US dollar fell strongly on the week.
Over the last week the oil complex was higher across the board with RBOB gasoline the biggest gainer in the complex. The Jan WTI contract increased about 4.33% or $4.19/bbl. The Jan Brent contract ended the week with a gain of 3.33% or $3.54/bbl. The Jan Brent/WTI spread narrowed modestly by the end of the week.

On the distillate fuel front the Nymex HO contract increased as distillate fuel inventories surged higher and way more than the expectation while US distillate fuel exports seemed to have decreased. The spot Nymex HO contract increased by 1.68% or $0.0495/gal. Gasoline prices increased strongly on the week as gasoline stocks increased only marginally and less than the expectations. The spot Nymex gasoline price increased by 7.2% or $0.1768/gal this past week.

Not much has changed in the Nat Gas markets except for yet another bearish weekly inventory report. The market has been drifting and trading in negative territory throughout most of last week as the market has now fully digested last week's -1 BCF withdrawal and categorized it as a yawn so far. As I mentioned recently Nat Gas is now completely in the hands of the weather as we are now in the very beginning of the main part of the winter heating season (Dec through Mar). So far there has not been enough colder than normal weather to result in enough Nat Gas consumption to make a difference in the overall supply and demand balances.

The one month forecast for the month of December made by NOAA just a few days ago is calling for below normal temperatures for the western third of the nation, above normal for most of the eastern third of the nation and normal for the middle of the country. I would not categorize this as a very bullish forecast nor one that will result in above normal withdrawal levels for December. There is much to make up as the month of November came in below normal in heating degree days for the entire country. Last year for the five weeks of December (EIA weeks) total withdrawals across the month came to 708 BCF or an average of 142 BCF per week. Withdrawals this year are going to have to exceed last year's average just to eat into the surplus in inventory versus both last year and the five year average. Nat Gas increased marginally as the shoulder season seems to be nearing an end. On the week Nat Gas futures increased by 1.67% or $0.0.59/mmbtu

On the financial front equity markets around the world ended the week significantly higher and near the lows made for the week. Fear of contagion coming from the southern EU member countries... although still a huge concern in the financial markets... eased a bit as the week progressed. Global equity values increased as shown in the EMI Global Equity Index table below.

The EMI Index gained 5.1% on the week moving the Index further away from the bear market threshold level of 20%. The EMI Index narrowed its year to date loss to 13.6% with the US Dow also in negative territory for 2011. The US Dow is still in the top spot of all of the ten bourses in the Index with seven of the remaining nine bourses still showing double digit losses for the year. None of the individual bourses in the Index are still over the bear market threshold of 20%. Last week the global equity markets were a strong positive for oil prices as well as the broader commodity complex.
The US Dollar Index depreciated in value on the week as confidence in the euro firmed up once again. By the end of the week cash was moving out of the dollar and slowly back into risk asset markets and out of the safe haven of the US dollar. The currency markets are still in the midst of a major realignment as I have been warning for months. Cash flowed into gold (and the rest of the precious metals complex) which increased by 3.51% on the week.

WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals and geopolitics I am keeping my view and bias at cautiously bullish. In addition the cloud of uncertainty got a tad smaller over the weekend in Europe but we will have to watch Europe closely as the sentiment could change on one or more negative news snippets at any time. WTI & Brent are once again back to being in sync with the direction of the US dollar and euro but are also being driven by the ongoing geopolitical situations in the middle east.
I continue to be a bit more positive for Nat Gas for the short term as discussed in detail above. Right now I would categorize the current market action as a market still looking for a reason to move higher and it is starting to get some of that reason...a projection of more normal weather and a constructive technical viewpoint. I am keeping my view and bias at cautiously bullish as the market is still in the short term uptrend but I must admit it is not a very convincing uptrend and one that could lose my attention early next week if prices do not start to move higher.

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

Best regards,
Dominick A. Chirichella
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