The energy complex is starting the week in positive territory even as the latest euro zone manufacturing data for November was surprisingly disappointing. November EU industrial output declined by 0.3% compared to October which was down by 1%. The market was forecasting a return to growth in November. Although there have been many positive global macroeconomic data points released over the last several months Europe is still struggling in recession while both the US and China are growing but still at a slower than normal pace.

The Seaway pipeline has now restarted at an increased level of 400,000 bpd from 150,000 bpd. Crude oil inventories in Cushing and PADD 2 are at all time highs and even with a higher rate of pumping from Cushing to Texas it is going to take a considerable amount of time before inventories in the mid-west region of the US come anywhere near normal operating levels. The Brent/WTI spread will also take a long time before it approaches historically normal levels. I expect Brent to trade at a premium to WTI well into 2014. I believe the main outcome of the expanded Seaway capacity will be to put a cap on the Brent/WTI spread with the spread slowly narrowing as more capacity from other pipelines come on stream over the next year or so.

The oil complex ended the week marginally lower... except for the spot WTI contract.. RBOB gasoline was the weakest link in the complex as gasoline inventories have now built by about 33 million barrels since mid November. WTI increased by 0.50% or $0.47/bbl as Brent lost about 0.60% or $0.67/bbl. Crude oil stocks in PADD 2 and Cushing were strongly higher as Seaway was shut down from maintenance. The Feb Brent/WTI spread narrowed by $1.14/bbl in anticipation of the restart of the expanded Seaway pipeline (restarted on Friday). The Feb spread is still currently trading near the upper end of the trading range that has been in play for the last several months.

On the distillate fuel front the Nymex Feb HO contract decreased by 0.30% or $0.0092/gal on the week as distillate fuel inventories increased strongly as temperatures were warmer than normal over parts of the US. Gasoline prices decreased on the week. The Feb Nymex gasoline price decreased by 1.04% or $0.0288/gal this past week even as inventories surged for the third week in a row.

The weather pattern could finally be changing. The latest NOAA six to ten day and eight to fourteen day forecasts as both decidedly more supportive for higher levels of Nat Gas heating related consumption than those from just a week ago. Neither forecast period is projecting above normal temperatures with the six to ten day forecast expecting below normal temperatures across most of the US. However, the eight to fourteen day forecast is a tad less supportive. The February Nat Gas futures contract increased by 1.22% or $0.04/mmbtu on the week and is now back into the $3.20 to $3.50/mmbtu trading range as the market continues to be focusing on a possible round of cold weather coming.

The last few weeks of January could prove to be a transition to the long awaited more normal winter like weather and thus a more normal withdrawal pattern from inventory. One thing for certain is the temperature forecast is going to be colder than last year which was a very warm winter. For example the time period covering the EIA inventory report that was issued yesterday experienced temperatures that were 9.1% colder than last year and thus the larger than expected draw from inventory this week.

Technically the spot Nymex Nat Gas futures contract may also be turning the corner showing the early signs of forming a bottoming pattern. We seem to be moving into a higher trading range of $3.2 to $3.5/mmbtu. At the moment the market has gained upside momentum in overnight trading after a relatively muted reaction to the inventory report in yesterday's trading session. The market sentiment may be changing to a more upside bias but will certainly need the support of continued projected winter like weather for the upside momentum to hold.

In the latest weekly EIA Nat Gas report relatively low demand during the month of December and the beginning of January contributed to the low prices. December 2012 was the 10th warmest on record, according to recent NOAA reports, with seasonally warm temperatures particularly east of the Rocky Mountains. Temperatures in December averaged 36.4 degrees nationwide, 3.4 degrees greater than the long-term average. Mild weather has persisted into January as well. The warm December was evident in the weekly natural gas storage withdrawal; the five-year average (2007-2011) withdrawals for December 2012 are all over 100 Bcf. A triple digit withdrawal did not occur until the week ending December 28, 2012; additionally, the WNGSR reported a net injection of 2 Bcf for the week ending December 7, 2012. While this is not unprecedented, there are only two other net injections in December on record (1998 and 2005).

On the financial front equity markets around the world were lower for the week with the China back into negative territory for 2013. Market participants continue to look at signs that suggest that the global economy may be starting to stabilize. Global equities are mostly higher for the year to date primarily as 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 slowly starting to move into the background.

Global equity values decreased as shown in the EMI Global Equity Index table below but remains in positive territory for the year.

The EMI Index decreased by 0.7% on the week with the Index still showing a year to date gain of 1.8%. Over the last week the Index decreased in value in most all of the bourses with just one bourse still in negative territory for the year... China. China remains the only bourse still in negative territory for the year. The Japanese bourse remains the best performing market in the Index showing a year to date gain of 3.9% with London a close second with a gain of 3.8% for 2013.

The euro was higher on the week while the US dollar was lower driven mostly by the ECB keeping rates steady. Last week the global equity markets were a marginally negative price driver for oil and most commodity markets.

I am maintaining my view at neutral and keeping my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are still suggesting that the market could be setting up for a breakout move to the upside as both WTI and Brent moved above their respective channel breakout levels. 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.

I am upgrading my Nat Gas view to neutral with an eye toward the upside if we get further follow through buying and supportive weather forecasts. I now anticipate that the market is less likely to test the $3/mmbtu support level if the actual temperatures are in sync with the latest NOAA forecasts. 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 heart of the winter heating season and currently those forecasts are bearish.

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

Best regards,

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy.


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