The second half of last week was laden with volatility as the oil market reversed direction several times. The battle between the slowing global economy and thus potential for a further slowing of oil demand growth versus the potential impact of money printing from central banks around the global as well as the impact of the recent rash of refinery issues that has resulted in gasoline shortages in California accompanied by surging retail gasoline prices. Sprinkled over the aforementioned price battle line is the ever evolving geopolitical risk in and around the middle east in particular Iran's nuclear program.

Crude oil prices declined for the third week in a row (see below for a more detailed discussion) as concerns over the slow growth global economy dominated all of the other price drivers last week. The biggest loser in the oil complex was WTI as the balances in the US are still biased to the surplus side for crude oil even though there are gasoline issues on the West Coast. The vast majority of macroeconomic data released last week from around the world was biased to the bearish side for oil and most risk asset markets as most of the date continued to support the slow growth viewpoint.

Even the US jobs picture was not all that supportive even though the headline unemployment rate dropped to 7.8% as only 114,000 new jobs were created in September or well below what is needed to keep up with the normal population growth in the jobs market let alone enough to impact the huge number of Americans still out of work. The jobs report is symptomatic of a slowing economy in the US. Moving over to China the data has continued to suggest the main economic growth engine of the world is also slowing. Last week the Golden week holiday... a major retail sales week in China... was also a bit disappointing with retail sales increasing by about 15% versus last year's Golden week which showed an increase in retail sales of close to 18%. Not a major absolute difference but the trend is indicative of a slowing of this economy. A slowing of China's economy will directly impact and result in a slowing of oil demand growth going forward.

Although there are no shortages of oil from any of the evolving geopolitical issues in the middle east these issues are bubbling up from many different locations. In just the last several days there are now conflicts at the Syrian/Turkey border and an unmanned drone was shot down over Israel this weekend (thought to be an Iranian drone). The overall tensions throughout the middle east are continuing to increase and thus the risk of a supply disruption is also increasing ...especially if there is an overreaction by any of the main players in the region...Israel or Iran in particular.

The oil complex ended the week lower... with the exception of RBOB gasoline... as shortages of gasoline have emerged in California as a result of refinery outage related shortages. WTI declined the most of everything in the oil complex even after a surprise draw in crude oil stocks for the second week in a row. WTI decreased by 2.51% or $2.31/bbl as Brent held up significantly better decreasing by only 0.33% or $0.37/bbl. Crude oil stocks in PADD 2 were modestly higher while Cushing inventories increased by about 135,000 barrels on the week. The Nov Brent/WTI spread widened significantly on the week by $1.94/bbl as the normalization process is only slowly proceeding. In fact the 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 decreased by 0.1% or $0.0033/gal on the week as distillate fuel inventories decreased modestly on the week. Gasoline prices increased strongly on the week. The Nov Nymex gasoline price increased by 1.11% or $0.0324/gal this past week.

Nat Gas futures were strong during the first half of the week and enough to end the week in positive territory. The November Nat Gas futures contract increased by 2.29% or $0.076/mmbtu on the week and is solidly trading above the key psychological level of $3.00/mmbtu as the market continues to be focusing on the upcoming winter heating season.

In spite of moderating temperatures forecast in the latest NOAA six to ten day and eight to fourteen day projections the spot Nat Gas futures market is holding up relatively well with prices hovering either side of unchanged throughout the session so far. The market is clearly in a winter heating season thinking mode. It would seem that in spite of the lack of strong nearby fundamental support market players are moving their focus to the perception mode of what the winter heating season may portray for upcoming Nat Gas demand. As I have been indicating I still believe that the market will need strong fundamentals for an extended period of time for prices to rally strongly from current levels and for the rally to last for a sustained period of time.

From a technical perspective the spot futures contract remains below the breakout level or new resistance area from the inverted head and shoulders pattern discussed earlier this week. at the moment the market still has the possibility of testing the next technical support level of around $3.20/mmbtu. For the moment the technicals remain biased to the downside.

On the financial front equity markets around the world were mostly higher for the week as market participants continued to digest the new solution presented by the ECB along with QE3 by the US both of which are viewed as actions that will bolster the global economy. The increase in equities were mostly a result of the view that all of the money printing by central banks around the globe will have a positive impact on the global equity markets. Global equity values increased as shown in the EMI Global Equity Index table below but are still solidly in positive territory for the year.

The EMI Index increased by 0.3% on the week with the Index now showing a year to date gain of 7.0%. Over the last week the Index increased in value in most all of bourses with just one bourse remaining in negative territory for the year... China. Over the last several months the global equity markets have been struggling to stay in positive territory but the perception of what the new rounds of global easing might do to the global economy has moved market participants back into a risk on trading sentiment.
The euro was higher on the week while the US dollar was lower. Last week the global equity markets were a neutral to bullish price driver for oil and most commodity markets for most of the week's trading sessions.

The oil complex has breached all of its current support levels and as such I am keeping my view at 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.

Markets are mostly lower at the end of the week as shown in the following table.

Note: Due to my travel schedule I am publishing Monday morning's newsletter on Sunday.

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


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