Energy Price Outlook
Oil prices are likely to hold within their relatively sideways direction in the near-term, as support from a weaker dollar is countered by uncertainty over the fiscal cliff. WTI had a nice bounce early in the session yesterday but fell back to close near the day’s low. Today’s trade will continue its focus on negative factors such as the lack of progress in fiscal cliff negotiations, recent signs of weakening economic data, and the potential that oil inventories remain elevated compared to their five-year average. The upside will focus mainly on the inability of WTI to break below the two-month consolidation bottom at $84.05, the potential of the Chinese economy to recover, and on the debt deal struck with Greece last week.
WTI settled 18c/bbl higher yesterday while Brent finished 31 cents lower. The market gained support early in the session due to the marginal recovery in the two Chinese PMI figures over the weekend. Support was also applied by weakness in the dollar caused by follow-through from last week’s debt deal with Greece. Oil prices fell around mid-morning in the wake of the ISM manufacturing PMI number, which fell to 49.5 from 51.7, with weakness caused by preparations for the fiscal cliff. The employment component fell to 48.4 from 52.1 which suggests that Friday's employment report could show a contraction in manufacturing jobs. WTI peaked at $90.33 before turning lower yesterday and held at the previous high made on Nov 19th at $89.80 on a closing basis.
The effects of the fiscal cliff are still evident in the oil market as well as other risk assets. It's likely that in true Washington style, the White House and Congress will delay a decision in order to show their constituents that they're fighting for them. It's frustrating for the markets because the negative effect that the uncertainty is offering could have all been avoided if there was action taken earlier in the year. Artificial pressure is thus forced onto the market, which in the current instance is being countered by weakness in the dollar.
European finance ministers eased the terms on emergency aid for Greece last week by cutting the rates on bailout loans, suspending interest payments for a decade, and giving Greece more time to engineer a bond buyback. The action has been positive for the euro and thus negative for the dollar, which is mainly an inverse gauge of the euro due to its composition. The two-way tug of war may continue in the near-term, as support from dollar weakness will be countered by the adverse consequences on the economy from the fiscal cliff.
Natural Gas
January gas futures settled 3.0 cents higher yesterday, as the focus turned to cold weather once again. CWG said that normal temperatures could be seen in the Northeast and Midwest from Dec 13th-17th. The focus on colder temperatures ran counter to events last week which began discounting the 60 and 70 degree temperatures being seen in the Midwest currently.
A secondary focus was likely given to technical factors, which sees key support between $3.52 and $3.57. The 200-day MA offers support in NGF3 at $3.52, the 50-day MA on the continuation chart is at $3.54, and the bottom of a bullish flag continuation pattern currently sits at $3.57. These three levels are backed up by a developing bullish divergence on the daily stochastics (chart below), and by a favorable seasonal pattern that began with yesterday’s close. Between Dec 3rd and Dec 20th, the market has gained 5.3% on average, although only 11 of the last 20 years saw rallies. In years where the injection season ended before Nov 9th as it did this year, the average increase is 11.0%. Prices advanced in 3 of those 4 years.
Prices are expected to bounce in the next few days, with technicals leading the way. Key resistance levels will be at $3.60 from the Nov 12th low and at $3.78 from the low on Nov 16th and we believe that prices may reach the latter level within a week or two. The biggest worry we have is the weather, which is still signaled by NOAA’s 6-10 day and 8-14 day forecasts as being above-normal in most of the country except for the northern tier. The degree day numbers from last week suggest a draw of 65 bcf in our view, which would be more than the 51 bcf withdrawal shown by the 5-year average. However, given the high temps in the Midwest currently, along with last week’s surprising build of 4 bcf, we don’t necessarily believe that Thursday’s number will be very bullish.
Global Economic & Dollar News
- China’s Nov MFG PMI was 50.6 vs. 50.8 expected and 50.2 previously.
- China’s Nov Non-MFG PMI was 55.6 vs. 55.5 previously.
- The U.S. Fiscal Cliff Talks didn’t produce anything positive over the weekend. House Speaker Boehner criticized Treasury Geithner’s proposal as being not serious and said that negotiations have gotten almost nowhere. Congressional staffers said that things don’t appear favorable behind the scenes just as they don’t in public.
- ISM MFG PMI was 49.5 in Nov vs. 51.4 expected and 51.7 previously. New orders were 50.3 vs. 54.2 previously while employment was 48.4 vs. 52.1. The group said the decline was partly the result of companies reducing activity before the fiscal cliff.
Energy News
- Morgan Stanley said oil prices are likely to fall through the end of the year before possible gains next year.
Upcoming Energy Events
Tue - API Inventories (4:30pm EST) Wed - ADP Payrolls
Wed - EIA Weekly Oil Inventories (10:30am EST) Thu - Natural Gas Inventories (10:30am EST)
Fri - U.S. Non-Farm Payrolls
Dec 12th - OPEC Meeting
Dec 12th - FOMC Meeting and Press Conference
Analysis
EIA Inventory Preview
The EIA may report a drop in oil inventories this week as the five-year average suggests, however, it should be much smaller than the 2.9 MB average decline. EOX anticipates a drop of 0.5 MB this week, as this year’s trend in December should be somewhat counter to that which is typical. Issues related to LIFO accounting typically cause refiners to reduce inventories late in the year when prices advance as the year progresses. Inventories typically fall 13.5 MB between the w/e Nov 30th and Dec 28th, according to the five-year average. Rising prices haven’t been an issue this year, and may help keep inventories elevated as a result. Rising domestic oil production is another factor that’s likely to keep inventories buoyed this week, as output has increased 1.33 mb/d in the 12 weeks since the 772 kb/d drop caused by Hurricane Isaac. Imports have trended near the low-end of the recent range, but there’s little incentive for refiners to increase them, with stocks currently more than 40 MB above the five-year average and refinery margins low.
Refinery utilization usually surges this week before reaching a small peak and declining through year-end. Given low profit margins, however, we don’t anticipate a very large increase. It’s safe to say that gasoline will build this week, but distillates have still been slow to increase. Gasoline demand is usually steady at low levels at this time of year, while distillate demand usually increases starting this week. We anticipate gains of 2.0 MB and 0.5 MB respectively.
Natural gas stocks may fall 65 bcf according to our estimate, as heating degree days were a fairly high 160-165 according to NOAA. Such a reading would cause our model to predict a draw of 85-90 bcf, however, it has underestimated increases in production for most of this year. Our estimate of 65 bcf is more than the five-year average would suggest is typical for this week, but we don’t necessarily expect a bullish market reaction on Thursday. A quick look at temperatures in Chicago showed them 1.07 degrees above normal during the survey week, which may reduce heat demand. We’re also wary about expecting a bullish number after last week’s 4 bcf increase.
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)
About OTC Global Holdings
Formed in 2007, OTC Global Holdings is headquartered in Houston and New York, with additional offices in Chicago, Jersey City, London and Louisville. It is a leading independent interdealer broker in over the counter commodities and the largest liquidity provider to CME ClearPort and ICE Clear U.S. Through its subsidiaries the company holds a dominant market share in the U.S. and Canadian natural gas markets, the U.S. power markets, crude oil and crude oil options, crude oil products and crude oil product options, agricultural and soft commodities, as well as structured weather and emission derivatives. The company serves more than 250 institutional clients, including 45 members of the Fortune 500, and transacts at over 150 different commodity delivery points. To learn more about the company, please visit http://www.otcgh.com or go to http://bit.ly/OTCYouTube.
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.