The start to this week's trading is all about the outcome of the Greek elections and the interpretation of that outcome by traders and investors. The pro bailout or New Democracy party squeezed out a win over the anti bailout party. Most risk markets reacted positively after the win was announced but the rally fizzled out much faster than the Spanish Bank bailout rally to start last week's trading. The market quickly digested the outcome and then turned their attention to what is likely a much larger risk...the evolving sovereign debt issues in Spain and Italy. In fact Spanish bond yields hit another new record high today.

Greece has also not solved anything with the only change occurring since last week is there is likelihood that a government will be organized but they will quickly have to deal with the existing conditions set forth in the original Greek bailout program...unless of course the new government also attempts to renegotiate the terms. Finally I and many in the market were expecting the pro bailout party to win and some of that was actually priced into the market during the second half of last week contributing to today's muted reaction.

Now that Greece is not likely to implode anytime soon market players are focusing on the plethora of market moving events that have yet to take place in June. In fact this week has three major events that could potentially impact the direction of risk asset markets..including oil. Today starts the third round of talks in Moscow between Iran and the West over Iran's nuclear programs. Heading into the meeting the expectations are rather low with not very many people expecting any major progress. Iran continues to insist that the West acknowledge and recognize its right to enrich uranium for what it says is a peaceful nuclear program while the West wants Iran to cap their enrichment program and allow more access to IAEA inspectors.

This is a two day meeting with plenty of time to achieve a breakthrough... however doubtful it may be. If the meeting ends with no progress the military drums will once again begin to surface and it could act as a floor in oil prices in the short to medium term as the geopolitical risk from the region gets elevated. On the other hand progress will send oil prices lower. I think there will be enough progress to justify another meeting and thus push the military option further into the future. The EU embargo is scheduled to officially begin on July 1st even though many companies have already reduced their purchases of Iranian oil over the last 6 months.

Also today and tomorrow the G20 meeting is taking place in Mexico. Of all of the June events I view this meeting as the least likely to have a major impact on the direction of risk asset markets as historically nothing of significance generally comes out of these meetings. On the agenda is discussions on a mix of measures like deficit reduction for some countries and pledges for additional stimulus by others with sounder finances according to a Canadian official. That all sounds interesting but the official communiqué is likely to be very general with no specifics and thus the meeting will fade into the background shortly after it ends.

The meeting with more potential to impact the direction of markets is the US Federal Reserve's FOMC meeting on Tuesday and Wednesday of this week. All eyes will be on Chairman Bernanke and his team to see if the Fed blinks and announces another round of quantitative easing. The economic data out of the US has been consistently showing an economy that is slowing while the employment situation (the second mandate of the Fed) is also faltering. I think the markets have been pricing in some form of further easing and if nothing comes out of the meeting I would expect to see a bit of a short term sell-off as a result. If they do embark on another program they may simply start by extending Operation Twist for a few more months and wait to see how the economy evolves during that timeframe and before initiating a brand new QE3 type program. I think the Fed will either do nothing right now or at best extend Operation Twist. I would be very surprised to see a new QE3 right now.

In addition to the above events there is also the potential for the US Supreme court to announce its decision on Obamacare sometime during the next two weeks. A Supreme Court ruling knocking down Obamacare could result in a relief rally on Wall Street and bring the upcoming Presidential election into the foreground prematurely and well before the election in November. Finally next week the full EU Ministers meeting takes place which also has the potential to be a major market mover especially with all of the sovereign debt issues bubbling up in Europe.

Over the last week the oil complex was lower with the complex losing about 1% (on average) while RBOB gasoline actually gained about 0.6%. The August WTI contract decreased marginally by about 0.07% or $0.06/bbl. The August Brent contract ended the week with a decrease of 1.55% or $1.54/bbl. The July Brent/WTI narrowed by about $1.48/bbl for the week as the normalization process 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 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.
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On the distillate fuel front the Nymex HO contract decreased by about 0.96% or $0.0256/gal on the week even as distillate fuel inventories decreased marginally last week versus an expectations for a modest build in inventories. Gasoline prices increased on the week after another surprise decrease in gasoline stocks. The spot Nymex gasoline price increased by 0.61% or $0.0165/gal this past week.

Nat Gas futures increased on the week while closing within the trading range of $2.25 to $2.50/mmbtu. The July Nat Gas futures contract increased by 7.31% or $0.168/mmbtu on the week and is now trading around the key resistance area of $2.50/mmbtu.

Nat Gas was hit with a strong round of short covering after Thursday's injection report showed a 7 BCF smaller injection into inventory than what the market consensus was calling for. Also as has been the case for the first half of the injection season this week's injection was below last year and the five year average for the same week. The previous week the injection report showed a build in inventory that was 6 BCF above the market consensus. We have now had a market miss in both directions of about the same magnitude the last two weeks in a row. Interestingly the market reaction when the injection came in above the consensus was noticeably less than the upside reaction from yesterday's underperformance in injection. This comparison shows that the shorts in this market are not very strong while the bulls are starting to gain momentum.

The market sentiment has been slowly changing since the market hit a bottom of $1.90/mmbtu back on April 20th. Since then the market has mostly traded in a range of $2.25 to $2.50 with some trading a tad outside of the range but less than 10 trading days since settling into the trading range. The entire recovery from the $1.90 low has been a result of an underperformance in injections since the start of this year's inventory building season. So far through Thursay's inventory report 192 BCF less Nat Gas has been injected into inventory versus last year while 188 BCF less was injected versus the five year average for the same week. This has been the main catalyst of the recovery rally in Nat Gas prices so far. The main contributors that have resulted in the underperformance of injections is some producer cuts, coal to gas switching and exports to Mexico.

On the financial front equity markets around the world recovered some of the lost ground from the previous weeks. The financial markets were mostly impacted by talk of a pro bailout victory in the Greek elections (which happened over the weekend), 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 back into positive territory for the year.
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The EMI Index increased by 2.3% on the week and is now in positive territory for the year by 0.5%. Over the last week the Index increased 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 January of this year. The euro gained ground on the week while the US dollar 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. I am still expecting the oil complex to remain the $80 to $90/bbl trading range basis WTI and $95 to $105/bbl basis Brent barring any surprises from the many June events. The outcome of all of the upcoming events I have been discussing in the newsletter over the last several weeks will determine whether or not oil prices move outside of the boundaries of the trading ranges.
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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 lower as shown in the following table.

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

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