Energy Price Outlook
Oil prices may fall slightly in the near-term, as pressure is offered by technical factors and the lack of progress in fiscal cliff negotiations. Background pressure will come from next week's OPEC meeting where quotas are expected to be left unchanged, and from the growing amount of U.S. oil production. These could take WTI down toward the $85.00/bbl level through year-end unless a fix to the cliff is negotiated. Opposing support will come from the two-week downtrend in the dollar, and from events in the Middle East. API data were bullish for crude yesterday and bearish for products. We would trade energies as a negative affair in the near-term, and given the relatively sideways nature of the market in recent weeks, patience will continue to be required.
WTI finished 59 cents lower yesterday while Brent settled down $1.08. The market followed-through to the downside early in the session after Monday’s bearish reversal pattern on the candlestick chart shown above. The weakness was mainly the result of bearish technical factors and a perceived lack of progress in fiscal cliff negotiations. It came despite the very same weakness in the dollar that supported the market on Monday, and despite the evacuation of the Egyptian president from his palace yesterday due to protests outside. Iran said that it captured a U.S. drone, but that event didn’t create much support either.
The technical situation is a bit negative in the short-term in our view, and stems from the bearish shooting star reversal pattern created on the candlestick chart on Monday. The reversal was made after the market tested and held at the Nov 19th high at $89.80 on a closing basis. The 50-day moving average was held with only a small breach. It also came after Friday’s COT data showed a reduction in the non-commercial net long of 40,625 contracts. Managed money traders added only 6,409 contracts to their small net long position. While technicals are negative based on these indications, it would have been more comforting to see yesterday’s trade close near the day’s low rather than recover back toward the high.
The lack of progress in fiscal cliff negotiations is also a key issue on the negative side and may remain so for another week or two. It’s difficult to see through the politics sometimes, as both sides likely want to take negotiations to the verge of the cliff in order to show constituents that their interests are being served. Some papers are suggesting that the president has an informal target deadline of Dec 15th and a hard deadline of Dec 21st. ABC has reported that republicans have a “doomsday plan” if negotiations break down that would extend tax cuts for those under $250K but offer nothing else on the debt ceiling, unemployment benefit extensions, closing loopholes, etc. Pres Obama suggested in a Bloomberg TV interview yesterday that there is potential for a deal but tax rates need to rise. The White House rejected the republican offer submitted on Monday immediately. It may not be the negotiations that are the most important here, but how they are perceived by ratings agencies. It didn’t seem in Aug 2011 that debt-ceiling negotiations to cut spending and make the U.S. less indebted would result in the loss of the AAA rating from S&P. But the negotiations proceeded for too long. If the economy goes over the cliff this year, a ratings downgrade could pressure the economy and thus oil prices.
Natural Gas
January futures settled 5.2 cents lower yesterday and more than wiped out the 3.0 cent rally seen on Monday. On another opposite note from Monday, the selloff was blamed on warm weather as opposed to Monday's colder forecasts. In our report yesterday, we noted that technicals were a slight positive in the near-term while weather was a negative, and we still feel that way after yesterday's trade. Prices could firm slightly in the near-term toward the $3.70-$3.75 range.
There's key support that's still intact at $3.52 from the 200-day MA in NGF3, at $3.54 from the bottom of a bullish flag continuation pattern, and at $3.57 from the 50-day MA on the continuation chart. Yesterday's trade settled in the middle of that range at $3.539. In addition to those technical levels, there's also support from a developing bullish divergence on the daily stochastics, and from a favorable seasonal pattern that runs from Dec 3rd-Dec 20th. The seasonal pattern is accentuated in years when the inventory injection season finishes early as it did this year.
The weather issue is a negative, as 70 degrees was reported in Chicago on Monday. Last week's gas trade lost more than 40 cents on the above-normal forecasts, and a report by Chicago's WGN on Monday adds to the prospect of a warm winter. It suggested that the average date of Chicago's first measurable snow since 1990 has been November 16th and said that the deeper the calendar goes into December, the stronger that history speaks for a sub-normal snow season ahead. Since 1990, the latest measurable snows have come on 2001's December 14th, 2003's December 10th, and 2011's December 9th. 2011 was obviously a warm winter and could suggest the same for this year, if reduced snow cover prevents reflective heating. NOAA's 8-14 day forecast yesterday showed above-normal temps in the eastern two- thirds of the country. We're predicting a draw in gas stocks on Thursday of 65 bcf, which would be greater than the 51 bcf average. However, we don't anticipate a strongly positive reaction given that last week's report of +4 bcf signaled that production may be strongly outstripping demand again as it did earlier this year.
Global Economic & Dollar News
- Australia’s RBA cut the cash rate by 25 bp to 3.00% which was as-expected.
- Spain’s Catalonia Region won’t hit its 2013 deficit target, according to the leader of the region.
- Pres Obama said that there is a potential of getting a deal on the fiscal cliff but said the Boehner proposal is still out of balance. He added the economy is “poised to take off” after a cliff deal.
- House Speaker Boehner said that the president is not showing that he wants to avoid the fiscal cliff. He said that instead, the president has offered a plan that could not pass either house of congress.
- Senate Minority Leader McConnell said that an enormous amount of time has been wasted in the fiscal cliff talks.
Energy News
- Iran said that it captured a U.S. drone over the Persian Gulf, although the U.S. said that none are missing.
- Egypt’s President Mursi left the presidential palace yesterday due to protests held outside. Protesters issued a “final warning” after he expanded his powers and called a referendum on a constitution drafted by an Islamist-dominated panel.
Upcoming Energy Events
Wed - ADP Payrolls
Wed - EIA Weekly Oil Inventories (10:30am EST) Thu - Natural Gas Inventories (10:30am EST)
Fri - U.S. Non-Farm Payrolls
Tue - API Inventories (4:30pm EST) Dec 11th - EIA’s Short-Term Outlook Dec 12th - IEA’s Monthly Report
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)
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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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