Dec futures ended 32 cents higher yesterday in WTI and 64 cents better in Brent. The market fell in the first half of the session and rebounded in the second, as the trading pattern resembled that of the stock market. Some support was seen in both markets overnight due to reports that the Spanish government would formally ask for a bailout of up to €60.0B out of €100.0B that the EU offered. There was also a report that Greece may obtain a loan of up to €20.0B to supplement its existing rescue package. The market later fell, however, as durable goods orders were mixed. The headline looked strong, but it was supported by a 2600% surge in aircraft orders. Excluding defense and aircraft orders, the number was unchanged vs. +0.2% previously. Even though jobless claims fell 23K, they nearly matched expectations and continuing claims were basically unchanged.

 

The mixed economic data may combine with the weak tone of the FOMC statement to show that the economy remains a headwind for oil prices. Fundamentally, pressure could also come from the small decline yesterday in Canadian syncrude prices. Prices fell because pipelines to the Midwest saw demand to ship crude that exceeded available space. The demand to ship was elevated due to the recovery from the outage of the Keystone pipeline over the weekend. While it could be taken as a sign of strong demand for oil downstream, there’s also the reasoning that low refinery utilization implies the opposite. WTI underperformed Brent yesterday and that also may have been a factor.

 

Natural Gas

November futures finished 1.6 cents lower yesterday while December was up 0.5 cents. Prices fell to their lows of the day just after the inventory number was reported, which incidentally matched the consensus forecast. The 67 bcf increase in inventories was only 2 bcf above the five-year average, but likely added pressure as it represented a change from recent patterns of inventories falling short of the five-year. Cold temperatures during the previous two survey weeks caused inventories to grow at 12 bcf and 20 bcf less than the five-year average had showed, and helped to relieve worries over just how high the new record high storage level would be. Those worries may have been overblown however. Even if inventory growth matched the five-year average in each of the four remaining weeks of the injection season, inventories may still reach only 3.956 tcf. That was very close to the EIA’s forecast several months ago, but that has since been revised down toward 3.903. The record is 3.852 tcf. While a number above the EIA’s projection could be seen as bearish, the focus will soon be changing to the winter demand season, which could end up underpinning the market.

 

 

 

One of the supporting factors for natural gas over the past month has been the pullback in the rate of supply growth. Focus had been on rig count figures earlier this year, and the expectation that their decline would eventually lead to reductions in supply. That changed around mid-year, however, as confidence in the predictive ability of rig counts diminished. The latest rig count figures are 51% lower than the peak made a year ago, however, the latest production levels are actually 0.2% higher. Questions have arisen with regards to classification of rigs as being oil or gas oriented when they are used in mixed fields such as Eagle Ford. Supply growth forecasts are being reduced nonetheless and can be seen in the EIA’s monthly reports. They’ve shown an initial 2013 growth rate of 1.04% which was projected in its Jan’12 report. That’s fallen to a 0.54% growth rate in its latest Sep report. The first chart below illustrates this and may be at least partially behind the recent firming tone of gas prices. The jump in the chart in June was caused by the shutting of wells in April, May, and June of this year. We think this, along with the hold in the November futures at $3.40/mmbtu will lead to a higher market in the near-term. NGZ2 could potentially re-test the $4.00 level.

 

 

Global Economic & Dollar News

• The Spanish Gov’t will formally ask for a bailout of up to €60.0B out of €100.0B that the EU offered, according to the Economy Ministry.
• Greece may obtain a loan of up to €20.0B to supplement its existing rescue package. Potential closure date for the loan is Nov 12th.
• Durable Goods Orders were +9.9% in Sep vs. +7.5% expected and -13.1% previously. Aircraft orders were responsible and increased to $14.66B from $535M previously. Non-defense capital goods orders ex-aircraft were unchanged vs. +0.8% expected and +0.2% previously (revised down from +1.1%).
• Initial Claims fell 23K to 369K vs. 370K expected. Continuing claims were 3.254M vs. 3.256M previously (revised up 4K).

 

Energy News

• Natural Gas Inventories were +67 bcf vs. +67 bcf expected. Inventories are 251 bcf (6.99%) above the five-year average vs. 249 bcf (7.06%) previously. Total inventories are now 3.843 tcf and are 98 bcf above the top of the five- year average vs. 52 bcf above it last week. The EIA forecasted in its Oct 10th Short-Term Outlook that inventories would end the season at 3.903 tcf. Our forecast made on Aug 24th is 3.984 tcf. There are four more weeks (give or take) left to the injection season.

 

Upcoming Energy Events

Tue - API Inventories (4:30pm EST)

Wed - EIA Weekly Oil Inventories (10:30am EST)

Thu - Chinese NBS MFG PMI (released Wed evening) Thu - Natural Gas Inventories (10:30am EST)

 

Editor’s Note: Daily Energy Report readers who are equity investors/traders only can gain access to the energy space through the following exchange traded funds (ETFs).

 

WTI Crude OIL

United States Oil (USO, quote)

Power Shares DB Oil Fund (DBO, quote)

Brent Crude Oil

United States Brent Oil Fund (BNO, quote)

Natural Gas

United States Natural Gas Fund (UNG, quote)

United States 12 Month Natural Gas Fund (UNL, quote)

First Trust ISE-Revere Natural Gas Index Fund (FCG, quote)

Coal

Market Vectors Global Coal Index (KOL, quote)

Power Shares Global Coal Portfolio (PKOL, quote)

 

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