Last week the short covering gains held and markets ended the week in positive territory... for most risk asset classes. The main driver of the short covering rally was mostly due to the majority of macroeconomic data that hit the media airwaves coming in better than expected...albeit still far from indicative that the issues in the developed world have been solved. In addition the rally did stall a bit on Friday when Fitch lowered the ratings for both Italy and Spain while Belgium was downgraded due to its bank exposure thus resulting in quickly moving the focus back to Europe... which remains the single biggest exposure to the global economic recovery for the short to medium term.

Over the weekend both Merkel and Sarkozy meet and conclude that they do in fact support a recapitalization of the European banks (what took so long to come to that conclusion?). They also promised to deliver a plan by the November 3rd G20 meeting. They went on to promise a durable solution for Greece's debt issues. The possibility of Greece default has increased considerably over the last several weeks and it appears that the European leaders are finally starting to recognize that exposure and starting to quickly come up with a way of either solving the problem or managing a default while preserving the EU and the euro. At least for the moment the markets are willing to give the EU leadership a bit more time... the upcoming G20 meeting is likely to be a major turning point in all of the risk asset markets. Absence a solid, durable plan most markets will head into a tailspin. On the other hand if they can convince the world that they have solid control of the issues markets will likely move higher or at least stabilize.

In the meantime oil and other risk asset markets will continue to respond to the macroeconomic data du jour as well as the weekly snapshots of oil fundamentals. In addition tomorrow both the IEA and the EIA will release their monthly oil forecasts while the EIA will also release their Winter Outlook in conjunction with their Short Term Energy Outlook Report. The weekly US oil inventory reports will be delayed one day as a result of the government closings for today's Columbus Day holiday.

The markets will be looking closely at both the EIA and IEA forecasts tomorrow insofar as their forecast for oil demand growth going forward. Both agencies have been slowly lowering their forecast over the last three or so months as the forecasts for global economic growth continues to slow down. With the macroeconomic data over the last few weeks not as bad as expected in the developed world I would expect both forecasting agencies to actually hold their oil demand forecasts steady (or about the same as last month's report) for this round of reports.

At the moment several key players in OPEC are continuing to indicate they do not view the current oil markets as oversupplied. Just this morning the Saudi Oil Minister said there is no excess supply in the world oil markets and that the kingdom has been adjusting output to match fluctuating demand over recent months. He went to say that Saudi Arabia would continue to pump at current rates even is Libyan oil returns to the market this long as customers are in need of oil. Saudi Arabia supplied 9.39 million barrels per day in September (lower than several previous months) according to the Saudi Minister. As has been the case for many years Saudi Arabia will remain the world's swing producer of oil as they have demonstrated during the bulk of the Libyan shut-in period. The statements coming out of particular those by the Saudi Minister strongly suggest to me that the rest of OPEC is not going to do anything at the December meeting and any adjustments to production going forward will be made solely by Saudi Arabia and strictly based on what they see as sort term demand at the time.

Equities in Asia ended with small gains while European equities are modestly higher as shown in the EMI Global Equity Index table below. The Index ended about unchanged last week and so far this morning (pre-US) it is still about unchanged from Friday's close. At the moment US equity futures are pointing higher when Wall Street opens in few hours and if it hold throughout the session the Index could possibly drop below the bear market threshold. The Index is still showing a 20.3% loss for the year with eight of the ten bourses in the Index still showing double digit losses. As mentioned above the outcomes surrounding Europe over the next several weeks will be crucial in determining whether global equities fall deeper into bear market territory or whether they begin to stage a solid relief rally. For the very short term (today) equities are a marginal positive for oil prices.
With WTI still trading above the $80/bbl level I have to keep my bias to the bullish side with a big caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data (jobs data in particular) due out this week are negative or if any of the 30 second news snippets surrounding Europe are bearish.
With the short term weather forecast a neutral at best and with yet another bearish EIA inventory report I have to keep my drivers at bearish. The reality of another bearish Nat Gas inventory injection report took a little time to settle into the price. That settling happened in Friday's session as prices were under pressure from the start and continued throughout the session and into this morning so far. The current price is well below the newly anointed resistance level of $3.61/mmbtu as it moves closer to the next stopping point from a technical perspective of around $3.40/mmbtu. The short term temperature forecasts as well as the tropics continue to be a neutral at best for prices in the short term. We are still a bit too far away from any serious winter heating demand and thus with little expected impact on demand over the next month or so I continue to expect the weekly inventory injection reports to outperform both last year and the five year average for the same week.

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

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