The week before last the market sentiment was bearish with little short term hope for any resolutions in Europe nor improvement in the global economy. Last week the market sentiment stated to change as talk of a Spanish bank bailout emerged. In addition China lowered short term interest rates to jump start its economy while talk of more stimulus in the form of another QE3 in the US dominated the airwaves (even though Bernanke gave no hints at his testimony last week). For the week the changing market sentiment resulted in gains in most risk assets (see below for more details). The weekend brought more support for the changing market sentiment with an official bailout of the Spanish banks over the weekend along with some supportive macroeconomic data out of China including a decline in the inflation rate which gives the government even more room to continue to move forward with an aggressive easing policy.

At least for the moment the selling of risk asset markets has subsided as short covering and some light new buying is now emerging. I do not know if there is a lot of upside in oil and equities at the moment but it certainly seems that the downside is now limited. Oil seems to be settling into an $80 to $90/bbl trading range basis WTI while the Brent trading range is $95 to $105. As long as progress continues to come from Europe on its sovereign debt issues while stimulus and easy money policies evolve in China and the developed world the US the unabated selling we saw in risk asset market just a few weeks ago is less likely to occur in the foreseeable future.

There are still many significant events in the month of June that can all turn out to be market moving events. So irrespective of the direction volatility is going to remain at an elevated level throughout the month. The remaining events start with the OPEC meeting on June 13-14. However the first major market moving event is the Greek elections on June 17th followed by the next round of talks between Iran and the West on June 18-19 then the US FOMC meeting on June 19-20 with the month ending with the EU Ministers meeting on June 28 - 29th. So in spite of the Spanish bank bailout over the weekend the event risk for the month of June remains at an exceptionally high level.

The Iran/West nuclear meetings are looking less promising at the moment after failed talks between Iran and the IAEA on Friday. Iran is still holding to their position while the West and Israelis are growing more impatient. As it looks at the moment the West is not ready to ease up on any of the sanctions as Iran has not shown any willingness to ease up on its nuclear programs. Although many refiners have already cut back on Iranian crude oil purchases the official start of the EU embargo is set for July 1st. Based on rough estimates Iranian exports are down about 500 to 600,000 bpd with that level expected to grow to about 1 million bpd when the embargo is in full force.

The Iranian government has been discounting the impact of the embargo so far but I find that to be hard to believe. Not only are oil exports down substantially but the price of oil is lower by about $25/bbl over the last month or so. Iran is getting hit from both lost exports as well as lower oil prices for is remaining exports. In my view the sanctions are impacting Iran and it is the only reason they are still at the negotiating table. I still think the Iranian are looking for a deal that allows them to save face within the greater Middle East. The next round of meetings are very important and if there is no progress the likelihood that the talk of military action will once again begin to hit the media airwaves especially from the Israeli perspective.

OPEC is meeting on Wednesday and Thursday of this week with all eyes on whether or not Saudi Arabia will agree to a cut in production. It seems that Saudi Arabia has been on a program of driving oil prices lower as an additional front on impacting Iran and motivating them to come to the negotiating table. Iran said last week that they expect Saudi Arabia to cut production at the OPEC meeting. I am not sure the Saudi's are going to be so willing to cut. I am expecting them to basically say they will support the market with whatever oil it needs to meet demand. I am expecting the OPEC meeting to end with a rollover of the current official production levels.

The bailout of the Spanish banks suggests to me that the EU is not ready to end the euro. As such I think the Greek population is not ready to exit the euro and I am still expecting the pro-bailout party to win enough support in the June 17th elections to be able to form a government and reaffirm the conditions of the existing bailout programs and in essence kick the can down the road for another 3 to 6 months

Over the last week the oil complex was higher with the complex gaining between 1 to 1.7% for the week. The July WTI contract increased about 1.05% or $0.87/bbl. The July Brent contract ended the week with an increase of 1.06% or $1.04/bbl. The July Brent/WTI narrowed by about $0.17/bbl for the week as the normalization prices slowly gets underway. 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 start to send the spread bulls to 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 increased by about 1.68% or $0.0442/gal on the week even as distillate fuel inventories increased much more than expected last week even as US distillate fuel exports were steady on the week. Gasoline prices also increased on the week even after another surprise increase in gasoline stocks. The spot Nymex gasoline price increased by 1.07% or $0.0284/gal this past week.

Nat Gas futures decreased on the week while closing within the newly formed trading range of $2.25 to $2.50/mmbtu. The July Nat Gas futures contract declined by 1.16% or $0.027/mmbtu on the week and is now trading below the key resistance area of $2.50/mmbtu.
Nat Gas has stabilized after yesterday's strong sell-off on a missed injection report. I must admit I think last week's injection report was a lot more constructive that how the market interpreted the report and subsequently traded around the outcome. The only bearish aspect of the report was the fact that the injection came in about 6 BCF greater than the consensus projections but still well within the range of projections. It also was well below both last year and the five year average resulting in the overhang in inventory narrowing for the twelfth week in a row. So overall the current fundamentals after the report remain much as they were before the report and maybe a tad improved.

With the stabilizing of prices on Friday (so far) the market is still settling into the $2.25 to $2.50/mmbtu trading range. I expect this trading range to remain in play for the next month or so at least and possibly longer if demand from coal to Nat Gas switching holds and producers adds further to cuts in production. The lower end of the trading range is being supported by the coal to gas switching demand as well as exports to Mexico...which is at the highest level in seven years. Cuts have been occurring but I still think the industry will have to cut further to avoid a premature filling of storage.

On the financial front equity markets around the world were recovered some of the lost ground from the previous week. The financial markets were mostly impacted by talk of a Spanish bank bailout (which happened over the weekend), China lowering short term interest rates and talk of further easing in the US and the EU. Global equity values increased as shown in the EMI Global Equity Index table below to the lowest level since December of last year.
The EMI Index increased by 1.4% on the week but is still in negative territory for the year by 1.8%. Over the last week the Index increased in value in most all of bourses with six bourses still in negative territory for the year with the overall Index now at the lowest level since the end of December of 2011. The euro gained ground on the week while the US dollar and Yen decreased modestly. Last week the global equity markets were a neutral to marginally bullish price driver for oil and most commodity markets. Last week was a risk on trading week for most risk asset markets.

I am still maintaining my oil view at neutral with one eye toward the bullish side. I am starting to expect the oil complex to settle into the $80 to $90/bbl trading range basis WTI and $95 to $105/bbl basis Brent. At the moment it is not so much that the current fundamentals have changed it is more related to the fact that the market sentiment is changing as participants move into the perception mode based on more stimulus which could result in an improvement of the forward fundamentals from a demand perspective (mostly based on China easing).
I am keeping my view at neutral and keeping my bias at neutral with an eye toward the upside now that Nat Gas has moved back to much more representative levels that are in sync with current fundamentals. 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 mostly higher as shown in the following table.

Best regards,
Dominick A. Chirichella
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