Oil and most risk asset markets struggled last week as the markets were mostly driven by a risk off trading pattern. As discussed in more detail below most of the risk asset markets monitored in the newsletter were lower for the week. Oil has been under pressure from all three major fronts… fundamentals, technicals and global economic outlook. On the fundamental front the markets have been hit with mostly bearish snapshots for the last two weeks.

Two weeks ago the IEA, EIA and OPEC all lowered their projections for global oil demand growth as both the developed and emerging market world countries all are experiencing a slowdown in their respective economies. In addition the weekly oil inventory reports for the last two weeks were both mostly bearish and reported a build in inventories… especially on the crude oil side.

On the technical side of the equation all of the main commodities in the oil complex have breached and solidly broken below key technical support areas over the last week or so. Although all of the commodities in the oil complex have been trending lower over the last few trading sessions the early stages of a technical bottoming pattern appears to be forming once again. I would caution at the moment as during the first week of April the oil complex was also in the early stages of a bottoming pattern only to fail and experience another strong leg to the downside. We will have to watch how this pattern evolves over the next week to see if the bottoming momentum holds or a new down leg begins once the short covering that began on Friday is over.

The global economy is slowing by most measures. The IMF updated their forecast for 2013 during the week and downgraded just about all of the countries in their forecast. They lowered global GDP for 2013 by 0.2% and even lowered their GDP projection for the main global economic and oil demand growth engine of the world… China. In addition most of the macroeconomic data released last week also supported the view that the global economy is starting to slow. As GDP is highly correlated to oil consumption a slowing of the global economy suggests that global oil demand growth is also likely to slow as 2013 evolves.

The oil complex ended modestly lower across the board last week with the Brent/WTI spread failing to maintain the widening pattern from the end of the previous week and thus narrowing by 0.44 percent or $0.05/bbl. Crude oil led the refined products markets lower on the week resulting in the only positive for the oil complex… a widening of the gasoline and 3-2-1 crack spreads.

The spot WTI contract lost ground as crude oil inventories continue to hover at all-time record high levels with gains in inventories in PADD 2 and in Cushing stocks. WTI decreased a tad less than Brent resulting in a small narrowing of the June Brent/WTI spread on the week. The spot WTI contract decreased by 3.59 percent or $3.28 /bbl while Brent lost about 3.29 percent or $3.39/bbl. Crude oil stocks in PADD 2 increased as did Cushing stocks as refinery runs in PADD 2 decreased by 1.9 percent suggesting that spring maintenance season is not yet over.

The June Brent/WTI spread was lower for the eight week out of the last nine weeks. The June spread narrowed by just 0.44 percent or $0.05/bbl. It is still trading well below the level it was at just prior to the announcement of the Seaway pipeline bottleneck at the end of January as well as below the level it was at when the Pegasus pipeline shutdown was announced. On the distillate fuel front the Nymex May HO contract decreased by 2.93 percent or $0.0842/gal on the week as distillate fuel inventories increased on the week on temperatures that were spring like over parts of the US during the report period. Gasoline prices decreased even with a small decline in inventories last week. The May Nymex gasoline price decreased by 1.05 percent or $0.0294/gal this past week.

The May Nat Gas futures contract increased strongly for the second week in a row by 4.41 percent or $0.186/mmbtu on the week after successfully breaching and staying above the technical and psychological $4.16/mmbtu level. Nat Gas prices remained firm ending the week and after the weekly inventory snapshot. For the last several trading sessions the spot Nat Gas futures contract has traded and settled above the $4.16/mmbtu support level. At the moment the technicals are suggesting that the market is building momentum for another test of working toward the upper resistance level of around $4.40/mmbtu.

The fundamentals remain supported by the atypical spring like weather forecast that is projecting below normal temperatures over the eastern half of the US. In addition the forecast for above normal temperatures over the western part of the country has compressed a bit over the last several days suggesting that the dominant impact on Nat Gas will likely be atypical heating related demand through the end of April.

As I touched on last week the so called lower demand shoulder season may turn out to be a short lived period as we are now almost a month into spring and thus the shoulder season and the weather is nothing like it should be for spring over major portions of the US. This could turn out to be one of those years when winter engulfs spring and the next actual change in weather will be summer which could bring on cooling demand very quickly.

On the financial front equity markets around the world were mostly lower on the week. The EMI Global Equity Index is now showing a loss for the year of 2.2 percent after declining by 0.6 percent last week. Global equity markets were a negative price driver for the oil complex last week.

The euro and Yen were lower while the US dollar index was higher for the week. Last week the global equity markets and the US dollar were negative price drivers for oil and most commodity markets.

I am maintaining my view of the entire complex at a cautiously bearish bias as inventories are starting to build and moving the complex back into a supply driven mode rather than a demand led market. In addition demand growth is starting to turn to the downside. Brent has now breached its range support level again with WTI and refined products not faring any better. The complex is now suggesting that the next move is likely to be a continuation to the downside.

I am maintaining my view at neutral for Nat Gas with a bias to the upside as the spot Nymex contract has been holding above the $4.16/mmbtu level for the last several days.

Markets ended the week mostly positive and ahead of the opening of trading for the week in Asia as shown in the following table.

Note: I am in London all week teaching and will be publishing the morning newsletters at different times. I am publishing Monday morning's newsletter in Sunday.

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy.

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*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.


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