Crude oil is continuing its march higher as WTI is now trading around the $103/bbl level while Brent is around the $120/bbl mark. The main price driver continues to be the evolving geopolitical situation in the Middle East coupled with better than expected economic data out of the US on Thursday and progress in the Greek bailout deal. Nothing just mentioned is very new to the market but it has been enough to keep the market sentiment biased to the bullish side. Some of the bullish sentiment has worn off overnight as most all of the oil commodities in the complex are now negative for the day except for WTI which seems to be the recipient of a modest round of profit taking selling in the Brent/WTI spread. Overall not much has changed throughout the week with the main price drivers still in place and the market sentiment still mostly bullish for oil and the broader commodity complex.

In Asia the latest out of China is suggesting that the government may set a lower growth rate objective for the economy when they meet at the annual organizational and planning meetings in March. In addition a top economic figure in the China hierarchy suggested that the government would not lower bank reserve requirements during the first quarter and would not likely lower short term interest rate this year. This suggests a very mild accommodative policy and not the very aggressive one that many in the market have been expecting. How China's economy performs throughout the coming year will have a lot to do with how the rest of the global economies perform. It will also be a major factor as to how oil and the broader commodity complex performs as China is the main oil demand growth engine in the world.

The never ending Greek saga continues for another day without a concrete deal in place nor a release of the latest round of bailout funds. As it stands right now as long as Greece meets all of the requirements set forth by the EU the finance ministers will probably approve the package. This process has been evolving for seven months so far but the media news snippets floating around the media airwaves are starting to suggest that an approval is nearing and the Greek bond restructuring is also progressing For the moment (which tends to change almost hourly) the market is looking more favorably toward a resolution sooner than later.

In spite of the uncertainty surrounding Greece the global equity markets have continued to add value as shown in the EMI Global Equity Index table below. The Index gained another 1% over the last twenty four hours resulting in the week to date gain increasing to 2.8%. On the year the EMI Index is now higher by 12.7%. The Index has recovered almost 85% of last year's loss of 15.2% in the index in a little over six weeks. The global equity markets are in a strongly trending upward pattern but as I have been indicating they are hovering in overbought territory for several weeks and remain susceptible to a modest round of profit taking selling. I thought we were seeing the beginning of a corrective move the other day but so far the buyers have came back strongly after the better than expected economic data out of the US on Thursday. Clearly the global equity markets remain a positive price drive for oil and the boarder commodity complex. Not much new on the geopolitical front other than the tensions remain at an all time high between Iran and pretty much the rest of the world (except for Russia and China). As I have discussed numerous times in this newsletter I do not see any shortage of oil related to the EU embargo of Iranian crude oil purchases and/or the Iranian embargo of Europe (status of this is still unclear). This is turning out to a be a logistics exercise as I have also pointed out it would be. For the moment the risk premium in the price of oil is based on a view by market participants that some sort of supply disruption will occur due to the rising tensions in the Middle East. So far there are no signs of any disruptions but it is a risk region and one that is volatile enough that anything can happen at any time. For now there are no signs of anything happening that would result in a disruption in supply in the short term. At a minimum the Middle East situation is acting as a floor in oil prices with a spike in prices occurring from time to time when the rhetoric ratchets up as we saw for most of this week.

WTI is still trading above its intermediate support level and seemingly settling in to a $97 to $102/bbl trading range. Brent has also breached its resistance level with a path that could possibly take it to the $120/bbl level. But as with WTI... Brent is also settling into a new short term trading range of around $116/bbl to $120/bbl. Oil continues to be driven by the evolving geopolitics of the Mideast...in particular Iran with just about all of the other normal prices drivers taking a secondary role...including fundamentals. I am keeping my view at cautiously bullish and keeping the caution flag flying to remind all that the market is still susceptible to a modest round of profit taking selling in the short term. A larger than expected withdrawal from inventory yesterday has been enough to send the Nat Gas futures market back into a modest short covering rally. As of this writing the spot Nat Gas futures contract has recovered all of Wednesday's losses and is now marginally higher on the week. The sentiment in the market is slowly changing as demonstrated by the reaction to Thursday's inventory report (so far). The withdrawal level of 127 BCF was above the consensus number of about 120 BCF or only a 7 BCF beat. On the other hand the withdrawal was significantly below last year's level of 230 BCF or 103 BCF lower and 51 BCF below the five year average for the same week...a very bearish outcome. Yet the market is focused solely on the comparison of the consensus which in the whole scheme of things has nothing to do with nothing or simply put does not make Nat Gas bullish at all.

The true analysis is to simply look at the growing surplus in inventory compared to last year...now at 817 BCF and 766 BCF compared to the five year average. All signs continue to point to an all time record high level in inventory at the end of the winter heating season. Yes the report is really bearish and yes the fundamentals are getting more bearish as each winter week passes by but for now the market is not ready to face that reality and is convinced that a withdrawal level that is 7 BCF greater than the market forecasts is really the most important data point of all in this report. As I said above the market sentiment seems to be changing with the bottom pickers starting to dominate the remaining bears. But be careful as reality will eventually set back in. Yesterday's EIA report was bearish from every angle one can look at except when compared to the market consensus. The withdrawal was slightly more than the consensus expectations but the report is still clearly bearish as the EIA report had a net withdrawal (127 BCF) significantly below both last year and the five year average for the same week. The net withdrawal was above the consensus projection for a withdrawal of 120 BCF. The market participants reacted to the data in a bullish manner and remain that pattern as of this writing. The inventory surplus widened versus both last year and the more normal five year average also. The current inventory level is now 766 BCF above the five year average.

I am still keeping my view at neutral and bias at bearish as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally.

Currently markets are mixed as shown in the following table.

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