*Inventory report schedule during the holidays:
API report will be released at 4:30 pm EST Thursday Dec. 27 and Jan. 3
EIA petroleum report will be released at 11 a.m. EST Friday Dec. 28 and Jan. 4
EIA natural gas report will be released at 10:30 a.m. EST Friday Dec. 28 and Jan. 4
Energy Price Outlook
Oil prices could continue higher over the next week or so, but we're cautious about the possibility that yesterday's rally has difficulty being maintained. The market may gain support from signs of improved economic conditions following PMI data in China and the U.S., the breakout in S&Ps to 2 1/2 month highs, signs of fund buying in COT data, and the military exercises being conducted by Iran. However, we're still cautious because oil closed +1.24% while S&Ps were +2.54% and short-covering or early-year positioning could have been at play. On the first day of 2012, oil was +4.18% and S&Ps were +1.55%, while the next day, oil closed +0.25% and S&Ps were +0.02%. Stocks kept moving higher for three months after that, while oil fell slightly in the months that followed. Given the expiration of the payroll tax cut, the recent upswing in oil prices, and warm temperatures, we'd look for gasoline and distillate demand to weaken and pose a risk to oil prices in the near-term.
Oil prices rallied sharply yesterday due to the resolution of the fiscal cliff on Tuesday. The Senate passed the measure at 2:00 am EST on New Year's Day with an 89-8 vote, while the House approved it on Tuesday evening in a 257-167 tally. The legislation extended tax cuts for individuals earning up to $400K/yr and made permanent fixes to the AMT and estate taxes. Despite the successful last minute resolution of the cliff, the procedure with which it was done showed that there are still large disagreements in Washington. It was worked on by Minority Leader McConnell and VP Biden after Majority Leader Reid failed to deliver a compromise. The inability to compromise will combine with upcoming wrangling over the sequester and debt ceiling in late-February to illustrate that Washington will remain at odds for the foreseeable future. That will act as somewhat of a drag on oil prices and demand, although the breakout to new 2 1/2 month highs yesterday shows that it was a very minor factor over the last couple weeks.
The rally yesterday received a tailwind from one of the factors with the biggest potential to support oil prices this year, which were improvements in Chinese economic data. The official manufacturing PMI was reported on Tuesday evening at 50.6 which was unchanged from November, however, the HSBC measure reported on Monday gained 1.0 point to 51.5. The HSBC measure has provided better signals recently than the more stagnant official figure. The Shanghai Composite index has been a strong performer since bottoming on Dec 4th, and has gained more than 16% since that time. The U.S.
ISM improved too in yesterday's report and increased to 50.7 from 49.5. Fundamental economic data may continue to boost energy prices in the near-term.
Technical factors played a role in yesterday's rally as well but are only slightly bullish going forward. Brent broke out to a new 2 1/2 month high yesterday, while WTI rallied above the top of a two-month old rising channel pattern. The most recent COT data show that non-commercials added 11,796 to their net long last week, while managed money accounts bought 14,458. The tide of sentiment thus appears to be on the bullish side of the market at the moment, which could keep upside momentum in place. At the same time, however, yesterday's trade in WTI closed unimpressively in the middle of the day's trading range and held at the top of the October consolidation at $93.66 (high on Oct 10th). Additionally, open interest has fallen 79,000 contracts since Dec 13th while the market has rallied $5.93 which indicates that short-covering was taking place.
Natural Gas
February futures settled 11.8 cents lower yesterday after a volatile session. There was a selloff of 30.1 cents in Tuesday evening's electronic session due to either an algorithmic trade gone wrong or a fat-finger trade, but it wasn't canceled and the market bottomed at $3.05. Prices moved back toward the $3.35 level as the night progressed until another wave of strong selling took the market down below $3.20 near the NY session's open. The biggest feature of the selloff was a change in forecasts toward warmer weather than was previously expected. They now appear to be above-normal at least through mid-January which is near the halfway point of the seasonal temperature curve. As a result, fear is growing that the market will exit the withdrawal season with a higher inventory trough than last year's 2.369 tcf. Inventories are currently 3.652 tcf after peaking at 3.929 tcf.
The spike lower made yesterday now appears as if it were a bullish reversal pattern on the daily chart. The low made at $3.05 was only slightly below the Apr 23rd life-of-contract bottom made at $3.079. Those would both appear to be bullish, however, the weather is becoming an increasing concern. The prospect of a record high stocks level at the end of the withdrawal season has forced funds to continue their liquidations. The most recent COT data show that managed money accounts fell 26,590 contracts last week to reach the largest net short since May 1st '12. Non-commercials sold 17,060 last week to reach the largest net short since Jan 17th '12. These factors suggest that a "sell the rallies" approach may still be warranted until there's any significant cold in the forecast.
Global Economic & Dollar News
- China's Official MFG PMI was 50.6 in Dec vs. 51.0 expected and 50.6 previously. It was reported on Tuesday. The HSBC measure was reported on Monday at 51.5 vs. 50.5 previously.
- The House Passed the Senate's agreement on taxes on Tuesday evening in a 257-167 vote. There were 85 republicans and 172 democrats that voted in favor, 151 republicans and 16 democrats voted against. The bill took care of the tax issue, but left the debt ceiling to be resolved by late-Feb. The sequester was delayed by two months.
- ISM MFG PMI was 50.7 in Dec vs. 50.5 expected and vs. 49.5 previously. New orders were 50.3 vs. 50.3 previously, while employment was 52.7 vs. 48.4.
Energy News
- The Fiscal Cliff Deal included a 1-year extension of the 50c/gal tax credit for alternative fuels. It covers natural gas fuels, LPG, and liquified fuels from coal and biomass. Natural gas accounts for more than half of all alternative fuels consumed.
Upcoming Events
Thu - API Inventories (4:30pm EST) Fri - Non-farm Payrolls (Exp +150K)
Fri - Natural Gas Inventories (10:30am EST)
Fri - EIA Weekly Oil Inventories (11:00am EST) Jan 16th - Iran-IAEA Meeting
Jan 29-30 - FOMC Meeting
May 31st - OPEC Meeting
Analysis
EIA Inventory Preview
The EIA may report a mild drop in oil inventories of 0.5 MB in our view, as the data round out the last reporting week of the year. The report will be released on Friday at 11:00 am EST. Last week's data was telling for the inventory situation, as the huge surge in demand reported in the prior week was undone. Oil production gained yet again and approached 20- year highs. Weak demand and elevated oil production could follow-through this week and will be additive to inventories. Imports may reduce oil stocks, on the other hand, as they typically fall through the end of the year as refiners tend to liquidate oil stocks.
Despite refiners' intentions to liquidate stocks through year-end, they tend to do it more through lowering imports than increasing refinery utilization. The rate of utilization usually trends in a flat direction in the last three weeks of the year before a sharp fall is witnessed in the first week of the new year. This could lead to similar gains in product stocks that were seen in last week's data, and we anticipate increases of 3.5 MB for gasoline and 2.5 MB in distillates. The latter may also be supported by warmer-than-normal weather conditions.
Natural gas inventories may decline 136 bcf in Friday's 10:30 am EST report. The forecast is based on NOAA's degree day calculations that totaled between 212 & 220 degree days and weather which was generally above-normal in the central portion of the country. A wide area that spanned from Texas north to the Great Lakes was above-normal, while the east coast south of New York City was generally normal or below-normal. The west coast was slightly below-normal. A similar degree day reading published last year resulted in a draw of 192 bcf, however, higher production levels in place now and qualitative issues with the distribution of cold weather cause us to put little faith in the analog.
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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