The improving sentiment carried over from yesterday and into this morning's US session so far. Over the last few days the market has slightly improved its view that the Europeans could be once again getting closer to a lasting solution to the sovereign debt issues that have been plaguing this region for over two years. Today the EU Finance Ministers will meet with the market anxiously awaiting the results. The risk asset markets remain captive to the daily news snippets coming out of Europe and will likely remain in this pattern for the foreseeable future. I thought Europe would have moved into the background several weeks ago but so far the markets have not gained enough confidence that all of the plans coming from various meetings with Merkel and Sarkozy are going to do the trick. Even the turnover of three governments...Greece, Italy and Spain was not enough to clear up the cloud of uncertainty.

Oil prices continue to be mostly driven by the direction of the US dollar and euro which in turn are being mostly driven by the evolving situation in Europe. From a secondary viewpoint the market is continuing to follow the geopolitical risk areas of the Middle East..Syria and Iran (at the moment) as well as the expected outcome of the December 14th OPEC meeting. On the geopolitical front the main concern is what happens if the EU embargoes imports of crude oil from Iran. Will the Saudi's make up the lost oil to Europe since the quality is about the same and the Saudi's remain very concerned about the evolving nuclear situation in Iran? Or will the Europeans have to struggle a bit to rebalance their system? As I have mentioned in yesterday's newsletter I very much expect the Saudi's will move more of its oil to Europe and an embargo on Iran will be mostly a impact on Iran and not to Europe. I believe that is the thinking that has begun to permeate around the markets and the main reason why the so called Iranian embargo premium quickly dissipated from the price yesterday.

With everything going on in the Middle East as well as how the last meeting ended (with the Saudi's doing their own thing regarding increasing supply to offset Libya) the upcoming OPEC meeting should prove to be a very interesting meeting. Some of the OPEC hawks like Venezuela are calling on OPEC to lower production back to the level it was at prior to the Libyan civil war. Since Saudi Arabia was the main country to increase production and with the Iranian situation looming I am not certain this will be a slam dunk decision by OPEC...let alone by Saudi Arabia. As we get closer to the Dec 14th meeting this topic will quickly begin to fill the oil media airwaves and will likely begin to impact the price of oil.

Once again I am not sure many market participants are going to pay much attention to this week's round of oil inventory data as Europe and the US are still in a state in the midst of uncertainty suggesting that this week's oil inventory reports may not have a major impact on price direction. At the moment all market participants are continuing to follow the tick by tick direction of equities and the US dollar (driven by Europe)... as they are both the primary price drivers for oil once again. Even with the fundamentals and geopolitics starting to impact price it is the macro trade that dominates at the moment. As such this week's oil inventory report could remain a secondary price driver at best and only impact price direction if the actual EIA data is noticeably outside of the range of market expectations for the report. The normal weekly reports get underway this afternoon when the API data will be released at 4:30 PM EST followed by the more widely watched EIA data on Wednesday morning.
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My projections for this week's inventory reports are summarized in the following table. I am expecting a mixed report with a marginal decrease in refinery utilization rates which should result in a neutral weekly fundamental snapshot. I am expecting a modest build in crude oil stocks with a slight decrease in refinery utilization rates. I am expecting a modest build in gasoline inventories and another draw in distillate fuel stocks. I am expecting crude oil stocks to increase by about 0.9 million barrels. If the actual numbers are in sync with my projections the year over year deficit of crude oil will widen to about 28 million barrels while the overhang versus the five year average for the same week will come in around 3.1 million barrels.

Even with refinery runs expected to decrease by 0.2% I am expecting a modest build in gasoline stocks. Gasoline stocks are expected to increase by about 1.0 million barrels which would result in a gasoline year over year surplus of around 0.5 million barrels while the surplus versus the five year average for the same week will widen to around 1.7 million barrels.

Distillate fuel is projected to decrease modestly by 1.0 million barrels on a combination a decrease in production and a possible increase in exports. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 26.1 million barrels below last year while the overhang versus the five year average will widen to around 10.5 million barrels.

The following table compares my projections for this week's report (for the categories I am making projections) with the change in inventories for the same period last year. As you can see from the table last year experienced pretty much the same directional moves as the projections for this week's inventory report. Thus based on my projections the comparison to last year will result in a minimal year over year change in inventories.
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WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals and geopolitics I am keeping my view and bias at cautiously bullish. In addition the cloud of uncertainty got a tad smaller over the weekend in Europe but we will have to watch Europe closely as the sentiment could change on one or more negative news snippets at any time. WTI & Brent are once again back to being in sync with the direction of the US dollar and euro but are also being driven by the ongoing geopolitical situations in the middle east.
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I am still bearish Nat Gas and unless some real winter heating demand begins to take hold prices could fall once again (as they did yesterday) in the short term. Right now I would categorize the current market action as a market looking for a reason to move higher. I am keeping my view and bias at neutral as I watch how price activity plays out over the next several trading session. As you can see from last week's short covering rally my reasons for moving to neutral a few days ago are being substantiated.

Yesterday was the last trading session for the December Nat Gas futures contract and it went out much like the weather... like a lamb. Even with the spot Nymex contract expiring selling was pretty much across the board with Jan/Feb, Feb/Mar and Mar/Apr intermonth spread contracts still in a contango... which is atypical for this timeframe as normally the winter spreads are in a backwardation. Even with the advent of more normal temperatures forecast by NOAA and most of the private forecasters the intermonth spreads are suggesting that the market is not the least bit concerned by the start of winter like weather and thus winter like heating fuel demand.

Although last week's 9 BCF injection was below the lower end of the forecast range it still resulted in a new all time record high inventory level with possibly another injection and another record coming this week. Over the last several days the temperatures have been well above normal for this time of the year in many parts of the country... especially the highly populated east coast which is a major Nat Gas heating fuel consuming market. The warm temperatures along with the ongoing robust supply situation should result in a modest injection level this week.

The Nat Gas market is still in a battle between all of the seasonal bottom pickers who have been moving in the market only to get stopped out pretty quickly as the market heads down. On the other hand the weather is starting to show signs that winter will eventually arrive. This is the main feature that is keeping the bears mostly on the sidelines or at least in the market with a very tight, short lease. This could be the last of the bearish inventory reports then the market will have to assess what actually happens when the cold weather does in fact arrive. By that I mean even with normal winter weather the combination of roust supply and record inventories the anticipated increased heating consumption may not have much of an impact on the overall supply & demand situation for Nat Gas. As such the bottom pickers might be disappointed when all is said and done as the market may not rise as much as many are expecting. In my opinion I think the weather is going to have to be very cold for a sustainable period of time for inventory withdrawals to be at an above normal rate of decline for prices to move into a sustainable upside rally. Keep in mind that during the second half of February...generally the coldest period of winter the spot Nat Gas futures market was trading below $4/mmbtu...too much supply.

Since Nat Gas is a very fundamentally driven market one needs to watch the winter intermonth spreads and as long as they remain in a contango they are suggesting that the supply & demand situation for Nat Gas continues to be oversupplied. My long signal will be based on a combination of technicals (when they appear) and the transition of the intermonth spreads to a backwardation. Obviously the weather forecasts will play a huge role in how the flat price and spread markets trade over the next month or so.

Currently as a new day of trading gets underway in the US markets are higher.
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Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.