Energy Price Outlook
The oil market is expected to eventually make a move above the top end of the past week's consolidation pattern in a more decisive manner than yesterday's intraday "breakout." We think that fund selling which has been prevalent in the last few weeks could diminish as many hedge funds closed their books throughout late-Oct. Support may also come from the restart of Northeast refineries, technical factors, and the approach of Tuesday's election. Focus will remain on the recovery from Hurricane Sandy, where 6.1 mln are still without power (compared to 8.1 mln on Tuesday). The EIA delayed yesterday's inventory report to today at 11:00 am EDT, while natural gas inventories will be released as scheduled at 10:30 am EDT. Focus will also be on the delayed ADP payroll report, Chinese manufacturing PMI figures, and the ISM survey. Yesterday's Chicago PMI was a bit negative both in the headline number and in the employment component, and could thus offer pressure today if the ISM follows suit. Pressure may also come from potentially lower oil product prices due to the restart of refineries and terminal racks, the maintenance shutdown of BP's Whiting IN refinery, and elevated levels of oil production and inventories. Calls for an emergency release of oil stocks subsided yesterday but could linger as a potential negative issue. We favor buying a break in Brent at $107.50 and risking below the recent low at $106.50.
Oil prices rallied 56c/bbl in WTI yesterday, while Brent fell 38c/bbl. A surge of buying took place around 11:15 am EDT, but the only news we noticed at the time was PSE&G's announcement that it was energizing substations in areas with refineries, which could therefore allow them to return to service later yesterday. It's difficult to say if that's what caused the rally because it wasn't unexpected, however, perhaps the news came a bit earlier than expected. Trade also focused on technical factors, where WTI was able to advance above the top of the top of the four-day consolidation pattern at $86.75. Even though the market didn't close above that level, we expect that it may be breached again, as large funds have been sellers recently and could reverse into new buying due to today's beginning of the month. Some buying may already be taking place, as open interest has increased about 18,000 contracts in the last five days while prices are about 50 cents/bbl higher.
Another story from yesterday was the volatility in the gasoline market and the strength in the front month. Yesterday was the Nov contract's last trading day which explains some of the strength as buyers can opt to take delivery. At the same time, the November contract only outperformed the December by 1.82cents/gal which implies that physical shortages may be limited in the near-term. That fits with news from PSE&G that it was energizing substations in areas with refineries nearby. Several operators also said that terminal racks were returning to operation, while Hess said that it still did not have power at Port Reading NJ. The impact thus appears to be limited, as refineries that were shut on Sunday or Monday are returning to operation by Wednesday after such a large storm. It demonstrations the difference between planned unplanned and shutdowns.
Natural Gas
December futures finished 0.1 cent higher yesterday while back months were lower by slightly more than a penny. The return of the floor trade witnessed light volumes overall and a small daily price change. Some support was seen early on cooler weather forecasts, but that changed slightly by afternoon, when NOAA's 8-14 day showed an area of above-normal temps in the western third of the country advancing east toward the Midwest. Three nuclear reactors were operating at reduced rates yesterday due to Hurricane Sandy, while three remained shut.
The focus today will be on inventories, which are projected to increase 67 bcf according to consensus. Such a gain would be 10 bcf above the five-year average increase and potentially add pressure to prices. That said, the key support will still be at 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 and could limit the market's losses. Support may also come from moderate fund buying and from reductions in supply growth.
Global Economic & Dollar News
- Spain's Rajoy told parliament that it is essential for European institutions to collaborate and assist Spain if the country is to reach its budget targets. He added that investors expect direct bank recapitalization, but that the capital needs of Spanish banks are less urgent than what was anticipated in June.
- Spain's Bank Bailout Tally may be cut to €30B from €40B.
- Portugal's Parliament is expected to approve the largest tax hikes in its modern history.
- IMF's Lagarde said that Greece needs two more years to meet its budget goals.
- An EU Spokesman said that the EU is narrowing open issues with Greece.
- Euro-Area Jobless Rate was 11.6% in Sep vs. 11.5% in Aug.
- Chicago PMI was 49.9 in Oct vs. 51.0 expected and vs. 49.7 previously. Employment was 50.3 vs. 52.0 previously, while new orders were 50.6 vs. 47.4.
- Rebuilding From Hurricane Sandy is expected to cost $100B, according to CNBC. Other sources said insured losses may be $10B. The difference could be flood damage, which usually isn't covered by insurance, and infrastructure, which is covered by local governments.
Energy News
- Northeast Refineries are reopening or assessing damage. About 981 kb/d of the total 1.289 mb/d in capacity at seven refineries affected began running at reduced rates yesterday, while two facilities are still assessing potential damage.
- PSE&G said that it is in the process of energizing substations in areas with shut refineries. Power was expected to be returned by the end of the day yesterday.
- Hess said that rack operations resumed at several northeast terminals outside of New York Harbor and New Jersey. Operations were resumed in other terminals such as upstate NY, Florida, North Carolina, and South Carolina. It said that its refinery in Port Reading NJ is still without power.
Upcoming Energy Events
Thu - Chinese NBS MFG PMI (released Wed evening) Thu - ADP Payrolls, ISM MFG PMI
Thu - Natural Gas Inventories (10:30am EST)
Thu - EIA Weekly Oil Inventories (11:00am EST) Fri - Non-farm Payrolls
Fri - Monthly EIA Natural Gas Report (12:00pm EST) 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 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)
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.
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