Last week was a week of much anticipation from the central bank meetings in the US and the EU. Both ended in disappointment by the segment of the market place expecting more easing out of the US and an announcement of bold action from the ECB. Neither met the expectations of the market but all was not so dismal insofar as how the markets eventually reacted to the outcomes of the meetings. The selling of risk assets after the outcomes were known was light and not very deep as many believe there is a possibility that the US Fed will embark on a new round of quantitative easing in August or September while the view that the ECB will come up with a stop-gap plan to solve the runaway bond yield problem of weaker member countries is still a likely possibility.

The markets are now once again back into anticipation and perception mode. Anticipation of what the US Fed might do over the next few months as well as what kind of a bold plan Mr. Draghi and the ECB will develop that will result in a strong level of confidence that the euro will be preserved. Along with the anticipation of a positive outcome the market is likely to trade in the perception mode or in a pattern of how the market will behave if either of the aforementioned events actually occur. Of course the degree of the perception trade is very dependent on how strongly the market believes both central banks will eventually act.

I still believe the US Fed is less likely to act over the next month or two versus the ECB which I do expect will come up with some form of bond buying programming. What the US Fed does (if anything) will be very dependent on how the macro economic data evolves over the next month or so. Friday's US nonfarm payroll data came in better than expected as more new jobs were created than anticipated but the headline unemployment rate increased to 8.3%. Although it was a better than forecast number job growth is still less than what is needed to keep up with population growth let alone starting to solve the huge overhang of unemployed Americans. That said the Fed may be waiting to see if the trend in jobs growth is changing....growing stronger than over the last several months.... and if so they could keep the brakes on a QE3 as employment seems to be their main interested at the moment.

On the other hand the situation in Europe is dismal. Borrowing costs for countries like Spain and Italy are soaring while the EU moves back into a double dip recession. There is not much for the ECB to anticipate as there is already a huge problem in Europe and one that has been lingering for three years. There is macroeconomic support for a bold program... it is just a matter of will the Germans stand by the ECB since they are still in the economic driver's seat. I think the ECB will get the support it needs and I think there is a decent likelihood that the ECB will announce a new plan sometime during the month of August. If my view is the one that the markets embrace than I would expect that most risk asset markets will have limited downside while the waiting plays out.

As a result of the short covering rally on Friday the oil complex ended the week in positive territory with RBOB gasoline leading the way higher. WTI declined more than Brent this week even as US crude oil inventories declined strongly on the week as did both gasoline and distillate fuel inventories. The September WTI contract increased by about 1.41% or $1.27/bbl while the September Brent contract ended the week with an increase of 2.32% or $2.47/bbl. The Sep Brent/WTI spread widened by about $1.20/bbl for the week as the normalization process is still interrupted by lower loadings out of the North Sea. I still expect the spread to gradually continue to narrow over the next 6 months as the surplus in the US mid-west is starting to recede from a combination of exports of crude oil out of the region through the Seaway pipeline coupled with refinery utilization rates at the highest level in months.
On the distillate fuel front the Nymex Sep HO contract increased by 1.23% or $0.0356/gal on the week as distillate fuel inventories declined strongly versus an expectations for a more modest build. Gasoline prices increased strongly on the week after a surprisingly large draw in gasoline stocks. The Sep Nymex gasoline price increased 4.80% or $0.1343/gal this past week. Everything in the oil complex gains just about what it lost the previous week.

Nat Gas futures finally came off of its highs declining for the second week in a row on an injection number that came in above the consensus level. The September Nat Gas futures contract decreased by 4.58% or $0.138/mmbtu on the week and is now trading below the key psychological level of $3.00/mmbtu.

The so called bloom has come off of the rose today after a bearish weekly injection report that came in higher than most all of the market consensus reports (see below for a more detailed discussion). The return of more nuclear capacity coupled with utilities slowly switching back to coal from Nat Gas is starting to impact the weekly injection reports as I have been discussing in the newsletter. Yes cooling related Nat Gas demand has been strong and is projected to remain strong at least for the next several weeks but it may not be enough to keep the weekly injections underperforming at the same rate they have over the entire injections season to date.The latest NOAA temperature forecast is still projecting above normal temperatures over a major portion of the US through August 15. This weather pattern should result in an above normal level of cooling related demand over the forecast period.

Last week's EIA report was bearish from the perspective that the injection was above the consensus level but bullish when compared to last year and the five year average injection level for the same week. The EIA injection was above the consensus (23 BCF) but below last year's injection and below the injection level for the five year average for the same week. The net injection of 28 BCF was above my model forecast (22 BCF) this week and at the middle of the range of market projections. The inventory surplus narrowed modestly versus both last year and the more normal five year average also. The current inventory level is now 407 BCF above the five year average.

On the financial front equity markets around the world were mostly higher on the week. The financial markets were mostly impacted by the expectation of some new bold action by the ECB and more easing by the US Fed is still a possibility as discussed above. Global equity values increased as shown in the EMI Global Equity Index table below and is now marginally in positive territory for the year.

The EMI Index increased by 1.1% on the week and is still in positive territory for the year by 3%. Over the last week the Index increased in value in most all of bourses with just two bourses still in negative territory for the year. Over the last several months the global equity markets have been struggling to stay in positive territory except for Germany which is soaring higher based on the falling euro which is a major benefit to this export driven economy.
The euro was higher (mostly during the second half of the week) on the week while the US dollar declined modestly. Last week the global equity markets were a positive price driver for oil and most commodity markets during the second half of the week.
Although there are now two tropical storms working at the moment the closest one... Ernesto does not look like it will be heading into the oil and Nat Gas rich portion of the US Gulf of Mexico while the other.... Florence looks like it may be on a path that takes it into the North Atlantic. Ernesto is now projected to move into southern Mexico and weaken to a depression over the upcoming weekend. Florence has already weakened and has been downgraded to a Tropical Depression and is projected to remain just a depression for the next five days as it moves more toward the north Atlantic. As it looks at the moment neither of these storms will wind up in the oil and Nat Gas rich area of the US Gulf of Mexico at this point in time. As I said last week the tropics now must be on everyone's radar and monitored on a daily basis.

I still think the oil price is overvalued and now with no action from either of the central banks this week I am downgrading my view back to neutral for oil. WTI is currently in a $85 to $95/bbl trading range while Brent is still in the $100 to $110 trading range. There are a lot of dynamics that will impact oil prices in the short term and the ranking of the price drivers are fluid and very susceptible to changing. The only constant for oil prices in the short term is above normal levels of volatility.
I am downgrading my view back to neutral as it is starting to look like the hot weather alone will not be enough to keep the weekly injections underperforming at the same low level as over the last several months. In addition the economics of coal switching continues to be favorable to coal... which will result in a reduction in Nat Gas demand the above normal cooling demand and nuke outages should keep injections underperforming.

Currently markets are mostly marginally higher as shown in the following table.

Best regards,
Dominick A. Chirichella
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