Energy Price Outlook

Today’s session will likely be muted again by the closure of trading pits in New York, but we expect moderate pressure to remain in place. The market may be setting up for weakness through tomorrow, when many hedge funds are expected to close their books for the year. Liquidations by funds have been shown through the commitment of traders data and by reports that many funds have been underperforming their benchmarks. Fund selling could be backed up by pressure from Hurricane Sandy, discounted Canadian syncrude, problems in Europe, and high levels of oil production and stocks. Prices could rebound later in the week, as the focus turns toward the eventual restart of refineries in the Northeast, technical factors, and early-November positioning. We favor buying a break in Brent at $107.50 and risking below the recent low at $106.50.

 

 

Oil prices traded slightly lower in WTI early yesterday and slightly higher in Brent before a wave of strong selling took both markets down around mid-day. The most dominant news adding pressure centered around multiple refinery shutdowns in front of Hurricane Sandy. The shutdowns increased as the day progressed, which assisted oil prices in moving further to the downside on expectations that a glut would develop. A table of the affected refineries is shown below. Gasoline prices fared the best yesterday, as refinery outages created worries that supplies would dwindle. Colonial announced a shutdown of its product pipeline which exacerbated the rally. It was somewhat puzzling that heating oil didn’t perform better, given the large inventory deficit shown between current stock levels and their five-year average. We would think that economic activity in the region would take a bigger hit than gasoline supplies, as power outages that cause refineries to shut down will also impact the ability of gas stations to pump the fuel from underground tanks.

 

 

Some pressure also came yesterday from a stronger dollar, which benefited from potential new problems with European debt. The Troika recommended that all holders of Greek debt except for the ECB take haircuts, while German officials suggested that no haircuts would be imposed on debt holders. The dollar rallied on that but was held back after Reuters reported that the fiscal cliff may not be dealt with immediately after the election. Our interpretation of the article was that the odds of a “risk-off” period may be increasing after the election, and thus potentially could pressure oil prices at that time.

 

In the more immediate-term, however, we think that prices will look first to Hurricane Sandy and then to the start of the new month on Thursday. A mass exit of funds from the oil market has taken place in recent weeks, and is shown by the COT data. Friday’s COT data showed that large funds have liquidated 80,770 contracts, or 30.2%, since making a small peak five weeks earlier. Managed money accounts have liquidated 41.3% of their net longs over the same five-week period. While that signals that momentum may be on the side of the sellers at the moment, the timing within the hedge- fund year-end suggests that prices may rally after Oct 31st and thus could become bullish in Nov.

 

Natural Gas

December futures finished 7.9 cents higher yesterday and performed the best in the futures price curve. The market focused on cooler-than-normal temperatures forecast for later this week and into next week. Weather Derivatives said that heating demand will be 14% above normal this week, while NOAA’s forecasts from last week showed below-normal temps in the eastern half of the country. Some focus was also centered on the back-end of Hurricane Sandy, which is expected to produce snow in its northwest and southwest quadrants. Sandy also offered support yesterday because of the shutdowns to nuclear capacity along the mid-Atlantic. Public Service Enterprise Group’s Salem 2,332 MW and Hope Creek 1,161 MW reactors were expected to be shut later in the day.

 

Prices are expected to continue gaining based on the cool weather as well as on inventory levels. Inventories are currently 9 bcf below the record with only four weeks left to the injection season. We anticipate a gain of 65 bcf this week, which would put inventories at a new record high. While that would appear to be bearish, we think expectations had previously been for a record high to have been formed already. We also think that the market’s focus is in the process of changing to winter demand and steady supply levels in 2013 rather than record storage levels. The last monthly EIA Short-Term Outlook showed the growth rate of production reduced to just 0.54% from 1.04% predicted back in its Jan ’12 report. We anticipate prices advancing toward the $3.90-$4.00 range over the next week or two in NGZ2.

 

 

 

 

Analysis

EIA Inventory Preview

This week’s oil inventories could pull back a bit following last week’s strong 5.9 MB increase, but the pullback should be small. We’re going with a number close to the five-year average, which shows a drop of 0.7 MB. That could have been much larger, but the approach of Hurricane Sandy late last week could offer a positive effect on inventories. In the week preceding Hurricane Isaac’s impact on the Gulf Coast, imports gained 1.29 mb/d with 944 kb/d coming in PADD 3. The gain may have been the result of a rush to offload and beat the storm, since PADD 3 imports fell 1.35 mb/d the following week. Additional support could come from continued high levels of oil production, which has been near 17-year highs over the last three weeks. Weak levels of refinery utilization could also be additive to oil stocks, as utilization has trailed the five-year average in recent weeks.

 

Inhibiting inventory growth could be the shutdown of the Keystone pipeline for four days at the beginning of last week. The line carries 590,000 b/d and was shut from Oct 18th-22nd due to safety issues. Another inhibitor to oil inventory growth could come from a potential demand surge in front of Hurricane Sandy. Demand surged before Isaac by 369 kb/d and then fell 174 kb/d and 943 kb/d in the two weeks that followed. Finally, the EIA’s inventory number is higher than API now by 5.52 MB and could also put downward pressure on overall stocks.

 

Product inventories may be pressured by a potential surge in demand and by relatively low refinery run rates. The rate of utilization typically bottoms in the w/e Sep 21st and gains 2.0% through last week. This year’s data, however, has actually shown a drop of 0.2% over that period.

 

Natural gas inventories are expected to increase 65 bcf this week. NOAA’s HDD numbers show readings of 68-75 degree days compared to 68-77 last week. Our model shows an increase of 42-53 bcf, however, it has an under-prediction error this week of around 20 bcf based on demand factors and increased production. Similar temperature readings a year ago produced a build of 92 bcf, and the five-year average shows a build of 57 bcf.

 

 

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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