Another week starts with Europe remaining on the forefront with further sovereign downgrades possible...like France...thus keeping a lid on any short covering rally in risk asset market at the moment. We are also in the beginning stages of many fund managers and institutional traders winding down their operations ahead of the Christmas and New Year holiday period. Liquidity will begin to slowly decline as this week moves forward with light liquidity all of next week expected.

Adding a tad to the cloud of uncertainty was the death North Korea's leader Kim Jong II which could result in political instability during the transition of the takeover of power by his son. Whether or not it is a smooth transition is yet to be determined. But even if it is and the son follows the path of his father North Korea will remain a geopolitical risk going forward.
Although the markets are still trading with a downside bias (including oil) market participants are looking for any signs that a short covering rally could occur before the end of the year. So far the sentiment does not seem to be changing and at best the global risk asset market could be moving more toward a neutral posture for the next several weeks. We will have to see how the market trades during the first half of the week and what new rumor or news snippets comes out of Europe as the week progresses.

So far this week is starting out on a quiet note with marginal gains after last week's blood bath in most all risk asset markets. There is a lot of ground to recover as last week ended significantly lower as shown in the EMI Weekly Price Board table below. As the situation in Europe unfolded and by the time the end of the week arrived most all risk asset markets were still struggling to regain lost ground. Last week was all about Europe and will remain all about Europe for the foreseeable future. The action and volatility last week was in all of the oil and commodity markets as well as the global equity markets. Last week was all about market players acting around the cloud of uncertainty that once again started to widen in all risk asset markets. Equity bourses were lower as uncertainty started to increase throughout the week. Precious metals decreased strongly as the US dollar firmed strongly on the week as cash moved into the safe haven of the US dollar and out of most risk asset classes.
/
Over the last week the oil complex was lower across the board with WTI the biggest loser in the complex. The Jan WTI contract decreased about 5.91% or $5.88/bbl. The Feb Brent contract ended the week with a loss of 4.72% or $5.12/bbl. The Jan Brent/WTI spread remains range bound for yet another week.

On the distillate fuel front the Nymex HO contract decreased even as distillate fuel inventories increased less than expected and US distillate fuel exports increased on the week. The spot Nymex HO contract decreased by 3.85% or $0.1120/gal. Gasoline prices decreased on the week as gasoline stocks increased strongly and much more that the expectations. The spot Nymex gasoline price decreased by 4.23% or $0.1100/gal this past week.

On the week Nat Gas futures decreased by 5.73% or $0.190/mmbtu. Not much new on the Nat Gas front... another day and yet another new year to date low made so far in the spot Nymex futures contract during the pre-opening period today. On Friday after making a new year to date low the market inched higher and recovered all of its earlier losses and is ended the trading session around the unchanged level. The last NOAA short term weather forecast (Sunday afternoon) was a bit more bearish than Friday's forecast. The current six to ten day and eight to fourteen day forecasts are still projecting that real winter weather is not likely to engulf a major portion of the US through almost the end of December which could get extended into early January. The heating degree day time clock is ticking away as October through December has seen lower than normal heating degree days and thus heating related Nat Gas consumption.

Nat Gas is likely to continue to drift lower until a bout of colder than normal temperatures engulf a major portion of the US. Until then the year over year and year over five year surplus of Nat Gas in inventory is likely to continue to widen. The very early estimates for next week's EIA inventory report are calling for a net withdrawal from inventory of about 85 to 95 BCF. This compares to last year's withdrawal of 181 BCF and the five year withdrawal versus the same week of 140 BCF. If the actual number comes in within the early projection range the surplus over last year will widen to almost 190 BCF while the surplus versus the five year average will widen to almost 400 BCF. With half of the winter heating season just about over it is going to take some consistent cold weather over a major area of the US just to eat away at the growing surplus of Nat Gas in inventory.

For interest last year's ending inventory at the close of the official winter heating season...end of March came in at about 1.58 TCF. That means the there has to be cumulative withdrawals of about 2.15 TCF from inventory to end at the same level as last year. Over the same timeframe that is left 1.99TCF was withdrawn from inventory last year. So the weather is going to have to get cold quickly and be colder than last year...which may not be the case the way the weather has been performing of late.
On the financial front equity markets around the world ended decidedly lower. Fear of contagion coming from the southern EU member countries... is still a huge concern in the financial markets and did not ease much at all as the week progressed. Global equity values decreased as shown in the EMI Global Equity Index table below.

The EMI Index lost 2.7% on the week pushing the Index closer to the bear market threshold level of 20%. The EMI Index widened its year to date loss to 16.5% with the US Dow still in positive territory for 2011. The US Dow is still in the top spot of all of the ten bourses in the Index with eight of the remaining nine bourses still showing double digit losses for the year. Paris, Hong Kong and China are still over the bear market threshold of 20% with Brazil very close to breaching the threshold level. Last week the global equity markets were a negative for oil prices as well as the broader commodity complex.
/
The US Dollar Index appreciated in value on the week as confidence in the euro faded once again. By the end of the week cash was moving into the dollar and out of risk asset markets. The currency markets are still in the midst of a major realignment as I have been warning for months. Cash flowed out of gold (and the rest of the precious metals complex) which decreased by 6.84% on the week.

Although WTI is still trading above the key technical support level of the mid- $94's/bbl the market has completely broken down as it did breach this level last week. I am not sure whether or not prices are going to hold the $94/bbl level after last week's strong sell-off. As such I will maintain my view and bias at cautiously bearish for the short term.
/
I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.

Currently as a new day of trading gets underway in the US markets are higher.

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