The strong downside move on Wednesday was quickly arrested as current fundamentals moved into the top spot of oil price drivers and overshadowed the slowing global economy... at least for a day or so. The imbalance of gasoline on the West Coast along with another unscheduled refinery problem in the Gulf Coast and with a partial shut down of a leg of the Colonial Pipeline (between Atlanta and Nashville) sent oil prices almost back to where they were before Wednesday's sell-off. RBOB gasoline led the way as several major oil companies actually began to ration gasoline supplies on the west coast as refinery shutdowns have had an significant impact on supply and has sent prices soaring in California. In fact some stations in California have actually run out of gasoline. RBOB gasoline prices on the Nymex are currently above where they were trading when the sell of actually began on Tuesday.

Although the US has had a comfortable surplus of crude oil for an extended period of time refined products inventories have consistently been running well below last year and the more normal five year average. Even gasoil stocks in Europe are the lowest levels in a long time. From a current fundamental viewpoint refined products have been the leading price driver for crude oil and with inventories at levels well below last year and the five year average they are likely to remain the main upside price driver each time the market gets concerned about the tightness in supply. That is exactly what is happening in California right now and what could happen along the east coast with distillate fuel if the winter heating season comes in much colder than last year. If stocks remain low heading into the heart of the winter heating season along with lingering refinery issues it will not matter how comfortable the crude oil balances are prices will remain firm. One major recipient of the current pricing relationships in the oil complex are the refiners as refinery margins are continuing to firm.

All of the above said the crude oil market is still in negative territory for the week and if it does not recover during the US trading session it will be the third weekly decline in oil prices in a row. The battle will continue between the main headwind... the slowing of the global economy versus the main tailwinds... nearby refined product imbalances, massive central bank money printing and a geopolitical backdrop. For the most part over the last several weeks the slow growth price driver has been the dominant factor impacting oil prices as well as the broader commodity complex.

With the Saudi's continuing to overproduce and flood the market with crude oil it will be an interesting battle within the fundamental sector between ample crude oil supply versus a growing imbalance on the refined product front. To the extent that all of the evolving refinery issues dissipate I would then expect refiners to ramp runs up both in the US and Europe as margins would support that strategy. However, it is not clear to me that the refining sector will get through all of its issues very quickly and firm refined product prices could last for an extended period of time. If so any downside correction from current levels is likely to be limited and somewhat shallow.

The main price battle lines will be much more pronounced today after the US Labor department releases the September nonfarm payroll data and the headline unemployment rate. There is a wide range of projections from about 100,000 to 130,000 new jobs created in September (depending on which media outlet you follow). The unemployment rate is expected to notch up 0.1% to 8.2%. If the actual data is in sync with the market projections I would expect a minimal reaction to equity, currency and commodity prices. Obviously if it comes in outside of the range of projections( either direction) there will be a strong reaction (one way or the other) at least in the period shortly after the data is released (8:30 am EST). If the data is in the vicinity of the projections it is still way too low to have a significant impact on the overall jobs problem in the US and it will not change the view of any of the US Fed members that voted for QE3 (actually one voting member opposed QE3). Even if the number is around the forecast it still would strongly suggest that the US economy is flat at best and more likely slowing further.

Overall global equity markets are about flat on the week as shown in the EMI Global Equity Index table below. Over the last twenty four hours most all of the bourses in the Index have gained ground (except China which is closed and Brazil). Heading into the US payroll report and the last trading session for the week the Index is now 0.1% higher widening the year to date gain to 6.8%. The three leading markets in the Index... Germany, Hong Kong and the US have all outpaced the rest of the bourses in the Index. Global equities have been a neutral price driver for the oil complex this week.

The oil complex has breached all of its current support levels and as such I have downgraded my view to neutral for today with an eye toward the bearish side if the correction continues further. The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics has moved toward the background for the short term.

I am keeping my Nat Gas price view at neutral with a neutral bias as the market seems to entering a downside correction mode. Even though current prices favor coal over Nat Gas (based on a macroeconomic comparison) the market is now more focused on the upcoming winter heating season and what it may due to Nat Gas demand.

After falling marginally immediately after Thursday's release of the latest EIA injection report the market quickly reversed and moved back into positive territory and ended the session with a marginal gain. This week's injection was above the consensus but still well below last year's injections level and thus for the moment it is being viewed as supportive for Nat Gas prices. The market was hit with a relatively strong round of profit taking selling on Wednesday and so far the selling has not continued into today's session. That said the spot Nymex futures contract is still below the breakout level of the technical inverted head and shoulders pattern and is still not recommended to enter into a long position until that new resistance area (around $3.43-$3.45/mmbtu) is cleared.

From a Nat Gas fundamental viewpoint not much has changed. The latest NOAA six to ten day and eight to fourteen day forecasts are still moderately supportive ... especially the shorter tem 6 to 10 day forecast which is still showing a large area over the eastern 2/3 of the US expecting below normal to even much below normal temperatures through October 13th. However, the 8 to 14 day forecasts moderates noticeably and is projecting a much smaller area of the country expecting below normal temperatures with no pockets of very cold temperatures forecast. The later is starting to move in the direction of the 90 day forecast issued a few weeks ago calling for mostly above normal temperatures through the end of 2012.

Markets are mostly lower ahead of the US trading session as shown in the following table.

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


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