IntroView

The reaction of the markets to Friday's decent jobs data was underwhelming. This morning has brought more of the same, although they are higher, after being lower most of the overnight. A couple of warning shots were in the news last week that are worth recapitulating: Alcoa announced that it is reducing smelting capacity by 12% and a major independent euro zone refining company is floundering, after having its banking lines frozen. The company, not well known outside the energy industry, Petroplus is akin to Valero here in the US. They are process of shutting several refineries; this could increase demand on US refineries for diesel and other fuels, and would be among the first direct hits to the US consumer from the euro zone debt crisis. The rescue of several Iranian sailors by the US Navy from pirates in the Gulf of Oman was not enough to spare a US-Iranian citizen a death sentence in an Iranian court earlier today. Also, Iran has announced it has a new uranium enrichment facility in operation that can make the good stuff. Obviously, the overall situation may quickly be moving into crisis mode. The euro currency broke under $1.27 overnight, with more to come, in our view. Tomorrow, we will get the Fed's Beige Book, which should make for good reading to see just how thorough or not the recovery is out there.
 

Petroleum Markets    
   
The equilibrium of the oil market will now balance on participants' perception of Iranian intentions versus the coming European recession and its effect on aggregate demand. While the later is certainly going to have a deleterious effect on structural price construction, the former will temporarily trump all macroeconomic analysis, and is primarily the reason prices are holding over $100. The main threat coming from Iran is the closure of the Strait of Hormuz. They certainly can close this vital choke point temporarily. The US Navy's 5th Fleet, stationed in Bahrain, should make fairly quick work of eliminating their maritime capability, but the ripple effect on ancillary elements could be felt for some time and exert upward pressure on oil prices. Alternative supply routes, and infusion of strategic reserves will obviate Iranian action, but there is no telling how prices may go in the interim. Prudence demands that hedgers allow for this and speculative interests will try and capitalize on it, despite the risks. What is certain is that response to an actual disruption will be more immediate than to the erosion of macroeconomic fundamentals. One is visceral, the other intellectual. The only certainty is that volatility will remain high until the threat subsides, so be extremely cautions.


Petroleum Tech Talk  
   
Fresh highs were struck last week above the previous mark of 103.37, forcing our bias to turn to the upside. However, even the old mark could not hold, and prices broke below 102.00 as the week concluded. There is support at 98.30 from Dec. 29th, the point from which the final leg higher broke. As long as that level holds we will keep our bias higher in acknowledgment of the Iran influence. A break below will suggest that the move higher has concluded at 103.74. A breach of 92.70 will target key support at 90.52, where a further break may point to the 74.99 low from October. A break above 103.37, target the Spring highs at 114.00, and we suspect it could be reached and surpassed very quickly on an exogenous influence.


Natural Gas        
    
After a precipitous decline subsequent to bearish EIA data on Thursday, the gas market headed into the weekend, assuming its familiar short-covering mode as weaker hands relinquished their short positions. Hardly surprising, as the only fundamental not structurally aligned against the market, the weather, turned mild again. Although NOAA's 6-10 day and 8-14 day forecasts are showing a dip in the mercury, it will not be sufficient to significantly dent swollen stocks, which now require a sustained period of extraordinarily colder than normal readings to come close to even a normal level of winter withdrawals. The construction of the market is such that any advance in price as a consequence of colder weather will not carry very far, particularly with a substantial portion of the higher demand season already in the history books, but the preponderance of short positions could make a temporary bottom close to 3.00.


Natural Gas Tech Talk  
               
Despite short covering activity, the downtrend remains intact, and so, we will keep our bias for lower. The target will be levels last seen in 2009, in particular, 2.72 and 2.39 from September of that year. As calendar heads into the coldest months of winter it will be difficult to hit these targets given the significant portion of short open interest. A clue will be successive Commitments reports showing a decline in those positions. But a test could be coming in March or April as participants ponder end of season totals busting records. On the upside though, stops should still be placed at 3.201, above which a settlement will suggest that a temporary bottom is in place and target 3.44, and trendline resistance beyond at 3.58.

source: KilduffReport.Com