With the Israeli/Gaza situation quiet since the truce was declared last week the oil complex has been having difficulty holding onto the price gains driven by the geopolitics of the region. At the moment oil prices are starting the week only slightly lower as many market participants are still concerned that the truce is a fragile one and the fact that the Syrian civil war continues to rage on with the potential to spread further beyond its borders. The geopolitics of the Middle East has been the primary price driver for the oil complex with mixed signals coming from the other normal price drivers.

The latest fundamental snapshot last week was bullish with a large draw in US total commercial stocks of crude oil and refined products. There were draws across the board but total inventories are still running at above normal levels for crude oil. On the supportive side distillate fuel stocks are at a very low level for this time of the year as the heart of the winter heating season gets under way. In addition distillate stocks in Europe are also at seasonally low levels. Depending on how the early part of the winter season evolves will determine the direction of heating oil and diesel prices irrespective of the outcome of the geopolitical risk in the Middle East.

On the economic front data from around the world has also been mixed but mostly suggestive of the global economy continuing to slow for the foreseeable future. Europe is in the forefront to start the week as EU Finance Ministers make another pass at trying to come to an agreement on the next funding payment for Greece. Last week they failed to come to an agreement other than to agree to a new round of meetings this week. This has been the pattern of the EU for the last four years as they have yet to come to a major solution that would put the entire sovereign debt issue into the background permanently. This has been a major cloud over the EU economy that has resulted in pushing the EU back into its second recession in four years with no positive signs that a growth spurt is coming anytime soon.

In the US the so called fiscal cliff it looming large over this faltering economy. The first round of meetings were held between the President and Congressional leaders with comments that progress has been made. More Republicans have hit to the media airwaves indicating that they may be changing their stance on raising taxes. I have been and still am of the view that a solution or deal will be reached. There is simply way too much risk to the fragile US economy with neither side of this issue willing to take the blame for potentially sending the US economy back into its second recession in four years. They will find a middle ground solution that will avert the drastic outcome if the fiscal cliff were to be triggered. This will be a positive for the US economy in the short term as well as the equity and commodity markets... including oil prices.

The oil complex ended the week higher across the board... mostly on the growing geopolitical risk in the Middle East as well as a bullish weekly US inventory snapshot. Brent and Nymex HO led the way higher on the week. Brent increased by 2.23% or $2.43/bbl as WTI gained about 1.56% or $1.36/bbl. Crude oil stocks in PADD 2 and Cushing were modestly higher for the second week in a row with refinery maintenance in the region being the main cause for stocks growing in the mid west once again. The Jan Brent/WTI spread was widened by $1.07/bbl as the normalization process is only slowly proceeding. In fact the Jan spread is currently trading at the highest level in months as the North Sea is still experiencing a slow recovery from maintenance.

On the distillate fuel front the Nymex Nov HO contract increased by 3.02% or $0.0903/gal on the week as distillate fuel inventories decreased modestly on the week on the back of winter like weather hitting parts of the US. Gasoline prices increased on the week. The Dec Nymex gasoline price increased by 1.25% or $0.0338/gal this past week.

Nat Gas futures put in another strong performance ending the week in positive territory. The December Nat Gas futures contract increased by 2.93% or $0.111/mmbtu on the week and is now approaching the key psychological level of $4.00/mmbtu as the market continues to be focusing on the upcoming winter heating season.

Nat Gas prices were trading either side of unchanged prior to the early release of last week's EIA inventory report. Once the inventory data was released the market immediately moved to higher levels. Last week's inventory report was bullish on all counts coming in above just about all of the industry projections as well as the consensus estimate . This is the second withdrawal of the season and with the current NOAA weather forecasts for the next couple of weeks there is now a modest chance that the next several weeks could also show a net withdrawal from inventory.

The Nat Gas market is primarily in the hands of the upcoming winter weather and how much Nat Gas is actually withdrawn from inventory. As shown below Nat Gas stocks are now just 0.6% above last year at this time (a major reversals compared to the size of the inventory surplus in early Spring of 2012). With the heart of the winter season expecting temperatures about 18 to 20% colder than last year and almost at normal levels a considerable amount of Nat Gas will continue to be withdrawn from inventory leaving a much more normal end of season level in inventory after this winter. So for the moment I would say that Nat Gas should remain relatively supported and a test of the technical and psychological $4/mmbtu resistance level could occur as early as next week.

On the financial front equity markets around the world were mostly higher for the week as market participants continued to look at signs that suggest that even though the global economy is likely to slow even further the positive early negotiations on the US fiscal cliff and the potential for a Greek aid solution were enough to bring out the buyers. Europe is now in recession. The increase in equities were mostly a result of the view that the combination of all of the money printing by central banks around the globe coupled by some of the uncertainty of the fiscal cliff and Greece possibly being solved was enough to have a positive impact on the global equity markets. Global equity values increased as shown in the EMI Global Equity Index table below and remain in positive territory for the year.

The EMI Index increased by 3.8% on the week with the Index now showing a year to date gain of 6.5%. Over the last week the Index increased in value in most all of bourses with just one bourse still in negative territory for the year... China. Over the last several months the global equity markets have been struggling to stay in positive territory and have been consistently losing value over this timeframe. However, last week's shortened trading activity pushed the Index back to the level it was trading at back in early November.

The euro was higher on the week while the US dollar was lower. Last week the global equity markets were a bullish price driver for oil and most commodity markets for most of the week's trading sessions.

I am keeping my view at neutral with a bias to the neutral side for today primarily due to the evolving geopolitical situation in the Middle East. At the moment there is no shortage of oil anyplace in the world but the market has been slowly building a risk premium into the price of oil in anticipation of a spreading of the fighting taking place between Israel and Hamas as well as the civil war in Syria.

The geopolitical risk has been the main bullish price driver for oil as the current fundamentals as well as the slowing of the global economy are both biased to the bearish side for oil. In the short term the price of oil will move based on the evolution of the situation in the Middle East. This is still an event driven move in the price of oil at the moment. The market is still holding the gains from earlier last week even though a truce was announced and is still holding.

I am keeping my Nat Gas price view at neutral as the fundamentals and technicals are once again keeping suggesting that the market may have topped out for the short term. I anticipate that the market will remain in a trading range until it becomes clearer as to how the heating season will evolve.

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

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


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