Energy Price Outlook
The oil market appears to be locked in a sideways continuation pattern, however, the timing of a potential breakout may still hinge upon the trading floors opening for normal operations. The CME said late yesterday that Nymex floor trading would resume only when the city lifts its evacuation order for Zone A. When trading finally does move outside of the sideways pattern, we think that it will be on the upside, with support offered by the end of several hedge funds' fiscal years, the restart of Northeast refineries, technical factors, and the approach of Tuesday's election.
Opposing pressure is still in place weak refinery demand for oil due to Hurricane Sandy, shutdowns of BP's Whiting and BP's Texas City refineries yesterday, discounted Canadian syncrude, and high levels of oil production and stocks. There is also some speculation over a potential release of oil reserves by the administration. We favor buying a break in Brent at $107.50 and risking below the recent low at $106.50.
As residents in the Northeast assessed damage yesterday, the oil market witnessed an uneventful and quiet trading session. NY pit trading was closed again, but WTI eked out a small 14 cent gain in the futures but Brent was 36 cents lower. Cash bond markets were closed along with cash equity and equity futures markets. Stocks are expected to reopen today which may provide some guidance on energy direction, but no word was available yet from the Nymex as of yesterday afternoon.
S&P futures were more than 10 points lower on Monday but recovered yesterday and ended the abbreviated session 3.5 points above Friday's close. A stronger close in European stocks took place yesterday along with some favorable earnings reports from BP and Deutsche Bank. Italian yields fell yesterday after favorable auctions of five- and ten-year notes. Crude futures finished higher yesterday but still slightly below Friday's $86.28/bbl settlement. Potential strength in global equities, however, may create a small "risk-on" bid in today's session.
Today's energy trade will also focus on refineries and yesterday's API inventory report. The API released its inventories as-scheduled yesterday but the EIA delayed today's report by at least one day. There was no word yet as to whether tomorrow's natural gas inventories will be released on time either. The monthly natural gas demand report was pushed back two days to Friday. Product inventories will come into focus in today's trade, as gasoline prices advanced 5.77 cents on Monday due to anticipated shortages in the Northeast.
Prices fell 2.80 cents yesterday perhaps on the likelihood that the gasoline supply/demand situation has essentially been frozen. Refiners as well as the Colonial pipeline had indeed shut down or reduced operations, which can be considered positive from a supply standpoint. However, gasoline stations have also been unable to pump gas from underground tanks due to the same loss of power that affected refineries, and thus may be considered negative from a demand standpoint. Supply shortages of gasoline may not be too great as a result. We'd also be more concerned about distillate inventories in the East Coast's PADD 1. Gasoline stocks are only 4.2
MB below the five-year average compared to 23.9 MB below for distillates (charts below). We think heating oil prices can outperform gasoline as a result. Delta's Trainer PA refinery shut down yesterday and is updated in our table below.
Natural Gas
December natural gas ended 11.2 cents lower yesterday in a session which saw most of the weakness delivered before 9:30 am EDT. Pit trading was closed again yesterday and may be so again today, unless the city lifts the evacuation order for Zone A. Equity markets are scheduled to reopen today, but it's unclear as to whether they require the Zone A lift as well. A small "risk-on" trade has taken place in the last two days, however, gas prices are not always affected by the risk trade. The EIA delayed today's monthly EIA-914 consumption report to Friday due to Sandy, and could delay tomorrow's inventory report as well.
The bigger issue for gas yesterday was the closure gas-fired power plants in addition to nuclear plants. Five natural gas plants serving New York and totaling 3,130 capacity were shut along with six nuclear plants. Around 8.1 mln customers were left without power from the storm. Monday's trade rallied nearly 8.0 cents partly on the potential that gas could have made up for shortfalls in nuclear output. Some pressure was also seen from forecasts which are projecting above-normal temps in the western half of the country. The east is expected to be near-normal, according to the 6-10 day. Estimates for gas inventories are ranging between 63-72 currently, according to Reuters. A midpoint of the range of 67.5 bcf would be around 10 bcf above the five-year average increase of 57 bcf, which may also have added pressure yesterday.
We still think that prices can stabilize above the July 31st high at $3.631 in Dec futures. Even though inventories may grow more than the five-year average, the winter withdrawal season is approaching. Support may also come from technical factors, moderate fund buying, and reductions in supply. Prices could trend toward the $3.90-$4.00 range over the next week or two in NGZ2.
Global Economic & Dollar News
- The BOJ expectedly eased yesterday, but increasing the amount of the APP by ¥11T to ¥91T.
- The PBoC injected liquidity yesterday.
- Eurozone Economic Confidence was 84.5 in Oct vs. 84.4 expected and 85.2 previously.
- German Unemployment was +20K in Oct vs. +10K expected. The unemployment rate was unchanged at 6.9%.
- The Bank of Spain published its flash estimate of Q3 GDP of -0.3% q/q. That compares to last week's tracking estimate of -0.4% q/q.
- Case-Shiller Home Prices were +2.03% in Aug vs. +1.90% expected and +1.20% previously.
Energy News
- BP's Whiting Refinery will immediately start work to replace the largest of three crude units. The Pipestill No. 12 unit has a capacity of 336,000 b/d.
- BP's Texas City Refinery said that a fire struck a residual hydrocracker unit yesterday and that the unit was shut. There was no timeline for restart provided.
Upcoming Energy Events
Wed - ADP Payrolls, Chicago PMI
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - Chinese NBS MFG PMI (released Wed evening) Thu - ISM MFG PMI
Thu - Natural Gas Inventories (10:30am EST) Fri - Non-farm Payrolls
Tue - U.S. Election
Tue - API Inventories (4:30pm EST)
Wed - Spain publishes assessment of budget measures
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 over all 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)
IMPORTANT NOTICE: Trading of commodities and commodity futures and options, and other commodity derivatives has substantial risk of loss, and is not suitable or appropriate for all persons. Past results are not necessarily indicative of future results. The information in this piece is based on sources that are believed to be reliable, but it is not warranted to be accurate or complete, and no performance or results from use of the information are warranted. This piece is not a solicitation or offer to purchase or sell commodities or commodity derivatives. Opinions expressed herein are subject to change without notice.
You must be logged in to post a comment.