Europe continues to keep a cloud of uncertainty over all of the risk asset markets. Yesterday was an example of the negative influence still coming from Europe. Most of the macroeconomic data out of the US beat expectations and was biased to the bullish side. Yet the equity and commodity markets were barely able to hold onto to small gains even though nothing new emerged in Europe. In fact noting new has emerged since last week's ECB meeting and the EU Summit on Friday yet the market is still trading as if the EU and euro will collapse in the short term. That is the environment that is likely to exist for the foreseeable future.

Oil prices have declined strongly this week and are likely to end the week with the second weekly decline in a row. As of this writing the spot Nymex WTI contract is down by a tad over $5/bbl for the week with the trading pattern looking like it is going to set into a $90 to $100/bbl trading range. Barring any new geopolitical risks I do not see WTI breaching the $100/bbl level. On the other hand unless the macroeconomic data out of China and the US take a turn for the worse I do not see prices dropping below the $90/bbl market. For now this is the trading range I expect to remain in place for the rest of this year and possibly into early January. The Brent/WTI spread has also been range bound throughout the sell-off over eh last two week still trading in the mid-$9/bbl premium to Brent. With new weather issues in the North Sea it does not look like the spread is going to decline much over the short term.

Global equity markets held steady over the last twenty four hours as shown in the EMI Global Equity Index table below. Global equities may be starting to stabilize and possibly setting up for a short covering rally barring any new negative news out of Europe. The Index is down by 2.5% on the week with the year to date loss holding around 16.3%. The US remains the only bourse in the Index that is still in positive territory for the year while Paris, Hong Kong and China remain in bear market territory as their losses for 2011 exceed the bear market threshold of 20%. Eight of the ten bourse are still showing double digit losses for the year. As it looks at the moment unless there is a massive short covering rally over the next two weeks it looks like the EMI Index is going to end the year in negative territory. Global equities have been a negative price driver for oil and the broader commodity complex.
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WTI and Brent continue to be linked to the direction of the US dollar and the euro and all signs suggest that this coupling will continue for the foreseeable future. Thus for short term directional guidance one has to continue to look at the direction of the currency markets. Today the US will get its latest reading on consumer inflation when the CPI is released at 8:30 am. Yesterday's PPI data was a positive.

Although WTI is still trading above the key technical support level of the mid- $94's/bbl the market has completely broken down as it did breach this level yesterday. I am not sure whether or not prices are going to hold the $94/bbl level after yesterday's strong sell-off. As such I will maintain my view and bias at cautiously bearish for the short term.
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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 any kind of strong upside rally absent some very cold weather for an extended period of time.

Nat Gas futures started yesterday's overnight session with a steep sell-off resulting in setting a new year to date low only to be followed by a modest short covering rally heading into the EIA NG inventory report release. Once the report was released it came in better than the expectations (larger injection than what was expected) but was quickly met with selling as market participants recognized that the report was actually bearish in that the injection this year was significantly below both last year and the five year average for the same week.

I know it sounds repetitive (because it is) but Nat Gas is bearish on all fronts with the only somewhat positive supporting a short time horizon pop in prices is the fact that the market is oversold. That said markets can remain in an oversold position for an extended period of time. Simply put the winter weather has not yet arrived and is not expected to arrive for a major portion of the US through pretty much the rest of December. This will result in the surplus in inventory continuing to widen through the rest of this year., You can get a feel for the magnitude of the exposure in the chart toward the bottom of the newsletter which clearly shows the growing surplus in inventory when it should already be declining at this time of the year.

The report was interesting (I do not want to say bullish) on the basis that the EIA report had a net withdrawal greater than the market consensus...but that is the only reason it was somewhat interesting. It was greater than the consensus projection for an injection of 93 BCF. The market participants initially bought the market but prices did top out pretty quickly (as described earlier in the news letter). The most significant point of the report is the fact that even with the third net withdrawal from inventory of total Nat Gas from inventory is still hovering around all time record level and the surplus is growing during a winter month. The surplus widened versus the more normal five year average also. In fact current inventory levels are now 348 BCF above the five year average.

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

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