Energy Price Outlook

Oil prices may hold within a sideways trading direction this week, as the short-term rally contends with a building bearish divergence on the daily stochastics oscillator. Near-term support may come from weakness in the dollar, yesterday’s assurance of accommodative Fed policy from Chairman Bernanke, and from expectations of improving economic data (housing and Philadelphia Fed on Thu). There’s a growing potential for pressure, however, from a bearish divergence on the stochastics oscillator, weakness in oil demand, and the prospects for supply growth to outpace that of demand. Saudi Arabia may also add pressure after the country assured oil supplies in a statement yesterday. If the growing divergence can pressure WTI, we’d look for a rebound after a test of the $91.50 level as well as a narrowing of the Brent-WTI spread. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00.

 

 

Natural Gas

Feb futures settled 4.6 cents higher yesterday, as the focus remained on colder temperatures. CWG predicted below- normal temps in the eastern U.S. from Jan 19th-23rd, and last week’s NOAA maps showed most of the country engulfed by the color blue. Friday’s COT report showed that managed money accounts subtracted 5,060 contracts from their net short, while non-commercials subtracted 7,468 contracts. That may suggest that they were exiting short positions possibly at the end of the week, but it’s not large enough to suggest that large funds are exiting their bearish strategies. Managed money has bounced 7,511 contracts in the last two weeks, but fell 110,904 in the month of Dec.

 

 

It’s difficult to get very bullish beyond the next day or two given technical resistance at $3.53, stable/rising gas rig counts, and an inventory withdrawal Thursday that will likely be smaller than the five-year average. Technical resistance at $3.53 is taken from the top of the 2H December consolidation pattern. Rig counts for natural gas drilling bottomed on Nov 2nd at 424 before stabilizing and now steadily increasing to 434. Horizontal counts fell to around 1,100 in early-Nov and are now 1,119. Lastly, inventories are expected to fall 129 bcf this week and is less than the 144 bcf shown in the five-year average. Next week’s inventories could potentially fall around 150 bcf which is less than the five-year average decline of 176 bcf. The bottom line is that even with short bouts of below-normal temperatures, inventories are on tap to end the withdrawal season with above-normal stock levels. Our end-of-season forecast is 2068 bcf and compares to the five-year average of 1714. We’d look for potential bearish action close to the $3.53 resistance level this week to think about a possible short position.

 

 

Global Economic & Dollar News

• Japanese PM Abe said that he wants to see the BOJ achieve its 2% inflation goal within the next few years.
• China’s Shanghai Composite advanced more than 3% due to speculation that the gov’t will expand the amount of capital that foreign institutional investors can put into Chinese markets.
• Fed Pres Evans (dove, voter) said that the current QE program could be wound down if the U.S. economy started creating 200K jobs for several consecutive months. He said that the Fed will likely begin raising rates in 2015.
• House Republicans are toying with the idea of shutting down the gov’t, according to Politico. The article suggests that more republicans are signing on to the idea than people realize.
• Fed Pres Lockhart (centrist, non-voter) said that he’s concerned about the size of the Fed’s balance sheet. The risk is that the Fed’s share of treasury markets could have adverse effects on market functioning and stability. Said that QE is open-ended now, and that it may take 3 years to reach 6.5% unemployment.
• Pres Obama said that a debt ceiling failure by Congress could mean a recession. Said that he will not have another debate with this Congress about whether they should pay bills that they’ve already racked up. Said that the job of deficit reduction can’t be done through spending cuts alone.
• Fed’s Bernanke said that the U.S. is in a relatively fragile recovery and that it shouldn’t be unduly hampered by fiscal cuts that are too sharp. At the same time, he said that there’s a need to think about long-term debt sustainability and that the federal budget must be brought under control.

 

Energy News

• Saudi Arabia said that its cut in production in December was not designed to push prices higher. December output fell 4.9% to 9.025 mb/d and was the lowest in 19 months. It added that it is committed to a stable market.
• The Brent-WTI Spread will narrow to $6/bbl in Q2, according to Goldman Sachs. It said that gasoline is vulnerable to an upside spike in prices during the summer because of low European refining runs.
• Natural Gas Truck & Bus Sales may reach 930,000 worldwide by 2019, according to Transport Topics. Currently, about 75% of the sales are to the Asia Pacific region despite high prices of natural gas there.
• Covanta and Clean Energy partnered to develop CNG filling stations at Covanta locations.
• Phillips 66 Wood River Refinery shut a crude unit at its 356 kb/d facility due to an electrical fire on Jan 12th. The unit will return to production “within a couple of days.”
• Chevron’s El Segundo Refinery in southern California experienced a fire which was reported to have damaged equipment.

 

 

 

Natural gas inventories are expected to be -129 bcf. NOAA’s HDD calculations were between 179 and 199, which compares to the previous week’s 238. Last week’s draw of 201 bcf was at the larger end of the consensus range, and was a bit higher than our model had predicted. There could be a small amount of retrenchment in this week’s figure as a result. Temperatures were above-normal in the northern Great Plains during the survey week and may help to dampen the withdrawal. The east coast saw near-normal temperatures.

 

 

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.