After experiencing the first weekly loss in five weeks the oil complex is starting the week in positive territory. A combination of uplifting data out of China and Germany along with the OPEC meeting this week in Vienna have all contributed to a mild round of short covering to start the week. Over the weekend China reported industrial output rose to 10.1%... year over year versus an expectation for 9.8% and 9.6% compared to Octobers' number. However, China's oil imports did decline in November by 1.3% compared to October in spite of a 4.2% increase in refinery runs. China is starting to show the early signs of stabilizing but still has a way to go before the economy enters into a sustainable growth spurt.

In Europe a mixed picture as the financial markets are negative on news that Italy's Monti is resigning but offset a tad by the better than expected increase in German exports in October. Exports grew by 0.3% versus September's 1.4% contraction. However, German manufacturing turnover fell for the second month in a row but at a slower pace than in September. As has been the case for several years the European economy continues to struggle with some positive flashes but still mostly negatives as the EU is projected to remain in a recession for the majority of 2013.

In the US the latest nonfarm payroll data released on Friday came in better than expected and was only minimally distorted by the Hurricane that hit the east coast in November. The macroeconomic data out of the US has been surprisingly positive over the last several weeks starting with an upgrading of third quarter GDP to 2.7% followed by positive employment data on Friday. That all said the looming fiscal cliff will have to be solved before any investor enthusiasm returns to the US market. I am still expecting a resolution to the fiscal cliff. The President and the leading House Republican met over the weekend. I am expecting a deal of some sorts prior to the Christmas holiday. I believe the Republicans will concede on a tax hike for the wealthy with some form of spending cuts to follow.

The oil complex ended the week lower... mostly on the weakening fundamental picture, a sluggish global economy, a movement of the geopolitics of the Middle East to the background and a mixed market view as to a resolution of the US fiscal cliff. RBOB gasoline and heating oil led the way lower on the week. WTI decreased by 3.35% or $2.98/bbl as Brent lost about 3.78% or $4.21/bbl. Crude oil stocks in PADD 2 and Cushing were modestly lower for the first week in three with refineries returning from maintenance in the region. The Jan Brent/WTI spread narrowed by $0.23/bbl as the normalization process is only slowly proceeding. However, the Jan spread is still currently trading near the highest level in months as the North Sea is still experiencing a slow recovery from maintenance.

On the distillate fuel front the Nymex Jan HO contract decreased by 4.75% or $0.1454/gal on the week as distillate fuel inventories increased strongly even on the back of winter like weather hitting parts of the US. Gasoline prices decreased on the week. The Jan Nymex gasoline price decreased by 4.51% or $0.1232/gal this past week as inventories surged for the second week in a row.

Nat Gas futures were hit with the realization that warmer than normal weather is on the way. The January Nat Gas futures contract decreased by 0.28% or $0.010/mmbtu on the week and is now below the support level of $3.60/mmbtu as the market continues to be focusing on the a bout of warm weather.

Last week's EIA report was bullish. However, the six to ten day and eight to fourteen day forecasts are still projecting above normal temperatures over major portions of the eastern half of the US through the third week in December. If the actual temperatures turn out to be as forecast heating related demand for Nat Gas is going to be below normal for the forecast period and likely result in either very low withdrawals or even a small injection. The weather is going to have to get a lot more seasonal for this time of the year and last for an extended time for Nat Gas prices to rally strongly form current levels.

In the latest weekly EIA Nat Gas report total consumption for the report week registered an overall decrease, reflecting lower demand across all sectors. According to estimates from BENTEK Energy LLC (Bentek), domestic natural gas consumption fell by 11.9 percent from last week, driven by a decrease of 23.5 percent in residential/commercial sector consumption. Industrial sector consumption finished the week down 2.1 percent, while power sector consumption dipped modestly (down 0.2 percent). Residential/commercial sector consumption trailed levels for the same week last year by a considerable margin (24.7 percent).

Total supply was unchanged for the week, largely reflecting essentially flat dry natural gas production. According to Bentek estimates, domestic weekly dry natural gas production declined 0.6 percent from the previous week's volumes (while remaining 0.5 percent higher than the same period last year). Imports from Canada rose by 7.4 percent, with all regions showing increased shipments, particularly the Midwest, up 25.1 percent. For the week, imports from Canada stand moderately below year-ago volumes (down 5.2 percent). While liquefied natural gas (LNG) sendout rose 25.3 percent over last week, sendout volumes remain well below (62.6 percent) year-ago levels.

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 the global economy may be starting to stabilize as well as a solution to the US fiscal cliff may be possible while the EU finally agreed to the next batch of financial aid for Greece. 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 now moving into the background could have a positive impact on the global equity markets. Global equity values increased as shown in the EMI Global Equity Index table below and remains in positive territory for the year.

The EMI Index increased by 1.3% on the week with the Index now showing a year to date gain of 8.1%. 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. The Index is trading at levels not seen since the middle of October and above the sell-off levels shortly after the US Presidential election. China remains the only bourse still in negative territory for the year and unless there is a sustained rally in Chinese equities it looks like this is likely to be the second year in row of losses for China. In spite of the downgrading in the growth rates for Germany discussed above the German bourses remains the best performing market in the Index showing a year to date gain of 27.5%.

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

I am maintaining my view and bias at cautiously bearish as the fundamentals are now biased to the bearish side as well as the technicals. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. However, the fundamentals, the markets view of the global economy, the US fiscal cliff negotiations and less so the geopolitics will be the price drivers in the short term pretty much in that order. This is still an event driven market for oil at the moment.

I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... even after last week's bullish inventory snapshot. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the early stages of the winter heating season and currently those forecasts are all still mostly bearish.

Markets are mixed heading 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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