The oil complex is starting the week in positive territory after a week of strong losses. In fact WTI experienced the largest weekly loss in six months while the Brent/WTI spread narrowed to the lowest level since June of last year. It is much too early to say if the oil complex is in the early stages of a bottoming pattern or just a mild short covering rally.

Last week the macroeconomic data was biased to the bearish side especially the huge miss in the US nonfarm payroll number which showed only 88,000 new jobs created versus an expectation for a gain of about 190,000 jobs. The headline unemployment number dropped to 7.6 percent. The unemployment rate is not very meaningful as the reduction was not a result of new jobs created rather it was due to another significant reduction in the participation rate. People continue to leave the job market and give up looking for a new job.

Over the weekend the latest round of talks between Iran and the West ended with basically no progress with both sides far apart on substance. At the moment there was no announcement by either side as to another round of talks which seems to be the pattern that has happened several times since the talks began years ago. As I suggested in last week's newsletter I did not see any motivation for Iran to give up a whole lot at this time as the West is in the midst of a potentially larger issue with North Korea. The outcome of the talks is a neutral to even slightly bullish outcome for oil prices as it does mean that the sanctions will not be eased anytime soon and the potential for new sanctions may be on the horizon.

Nothing new as to the restart of the Pegasus pipeline as Exxon continues the cleanup process. In spite of the Pegasus pipeline shutdown the Brent/WTI spread has continued in its narrowing trend after a very brief widening surge during the first part of last Monday's trading session while most of the Canadian grades relative to WTI have also continued to strengthen for all of last week. The spot Brent/WTI spread has narrowed to the lowest level since mid-June of 2012. For now the shutdown of Pegasus has not changed the overall crude oil spread economics of the region versus the trends that existed just before the rupture was announced. It remains to be seen yet if the main crude oil economic relationships will change if the pipe is shut down for an extended period of time.

The oil complex ended significantly lower across the board last week including the Brent/WTI spread which narrowed by 5.50 percent or $0.88/bbl. The spot RBOB contract led the complex lower with the largest percentage loss for the week as shown in the following chart. The spot WTI contract lost ground as crude oil inventories in the US increased more than expected with gains in inventories in PADD 2 but offset a bit by a small draw in Cushing stocks. The big feature of the week in the oil complex was yet another strong narrowing of the Brent/WTI spread as the North Sea continues to operate at normal production levels.

WTI decreased less than Brent resulting in another narrowing of the spot Brent/WTI spread on the week. The spot WTI contract decreased by 4.91 percent or $4.79 /bbl while Brent lost about 5.16 percent or $5.67/bbl. Crude oil stocks in PADD 2 increased while Cushing stocks decreased slightly even as refinery runs in PADD 2 decreased by 3.3 percent or 7.2 percent over the last two weeks suggesting that spring maintenance season is not yet over.

The May Brent/WTI spread was lower for the eight week in row. The May spread declined by 5.5 percent or $0.88/bbl. It is continuing to trade well below the level it was at just prior to the announcement of the Seaway pipeline bottleneck at the end of January as well as below the level it was when the Pegasus pipeline shutdown was announced.

On the distillate fuel front the Nymex May HO contract decreased by 4.06 percent or $0.01232/gal on the week even as distillate fuel inventories declined on the week on temperatures that were winter like over parts of the US during the report period. Gasoline prices decreased after a modest draw in inventories last week. The May Nymex gasoline price decreased by 7.79 percent or $0.2418/gal this past week.

The May Nat Gas futures contract increased by 1.45 percent or $0.059/mmbtu on the week after successfully breaching and staying above the technical and psychological $4/mmbtu level.

The Nat Gas futures market ended the week on a firm note on news of Southern Companies largest utility unit… Georgia Power experiencing an explosion and subsequent shut down of its 3,166 megawatt coal fired power unit. The explosion occurred late Thursday afternoon and will likely result in an increase in Nat Gas power related consumption until this unit is fixed and back on stream.

With inventories now slightly below normal (compared to the five year average for the current week) the market is now exposed to unscheduled interruptions in any part of the power grid that will ultimately result in an increased usage level of Nat Gas for generating power. The Georgia Power issue would probably not have even resulted in a blink had it occurred last year at this time when end of winter inventory levels were at a record high. However, with the overhang gone and the summer cooling season yet to come the market will react to any of these type of situations with a quick rally in prices… if for nothing other than short covering.

The spot Nat Gas futures price is now solidly above the technical and psychological $4/mmbtu level for the second time in two weeks. In fact the market has hit the highest price of the year and a level not seen in Nat Gas futures since September of 2011. From a technical perspective the market has broken out to the upside once again and with a few settlements above the $4 to $4.02 level will certainly result in a test of the next upside resistance level from September of 2011 of around $4.16/mmbtu. Basis the activity on Friday and the evolving fundamental situation I am upgrading my view and bias back to cautiously bullish but with a caution that all should use tight, trailing stops as the situation can change very quickly.

On the financial front equity markets around the world were mostly lower on the week. The EMI Global Equity Index is now showing a loss for the year of 1.7 percent after declining by 1.58 percent last week. Global equity markets were a negative price driver for the oil complex last week


The euro was higher while the US dollar and Yen bot declined for the week. Last week the global equity markets were a bearish price driver for oil and most commodity markets.

I am maintaining my view of the entire complex at neutral across the board but with a cautiously bearish bias as inventories are starting to build and jeopardizing the technical bottoms that have been put in place in the complex over the last several weeks. WTI has now breached its range support level as has Brent and refined products. The complex is now showing signs that the next move could be a continuation to the downside.

I am upgrading my view to cautiously bullish for Nat Gas even as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. The shutdown of Georgia Power's coal plant highlights the exposure that currently exists with Nat Gas inventories as slightly below normal levels. From a technical perspective the market has once again broken out to the upside and with a few settlements above the $4 to $4.02 level will certainly result in a test of the next upside resistance level from September of 2011 of around $4.16/mmbtu. Basis the activity on Friday and the evolving fundamental situation I am upgrading my view and bias back to cautiously bullish but with a caution that all should use tight, trailing stops as the situation can change very quickly.

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

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy.

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