Published October 29, 2012
Energy Price Outlook
This week’s trade in the oil market may witness bottoming action take place, as the U.S. election begins to move to center stage. There may also be an exit from the markets by hedge funds that close their books on Oct 31st, but the impact they actually exert may be somewhat limited in the near-term as their long positioning has already been reduced. Pressure early in the week may come from uncertainty with European debt, mixed economic data, weakness in syncrude prices, and high levels of oil production and stocks. Oil prices could form a bottom by mid-week based on technical factors, the shutdown of the Kirkuk-Ceyhan pipeline in Iraq, and on the potential that Hurricane Sandy increases demand for refined fuel. The mass fund exit that’s taken place so far could reverse after Oct 31st and become bullish in Nov. We would buy breaks in Brent at $107.50 and risk below the recent low at $106.50.
Friday’s trade finished 23 cents better in WTI and $1.06 higher in Brent. WTI futures were under pressure for most of the session, as uncertainty over Greece crept back into the trade. It was announced overnight that Greece may not be closer to resolution of its bailout extension as was reported on Thursday. The country faced a deadline yesterday with the Euro Working Group for extension, so whether that extension was made could have ramifications on today’s trade. The market rose slightly Friday morning on the U.S. GDP report, which was +2.0% in Q3 vs. +1.3% in Q2. Despite the increase and move away from recession, growth is still below the long-term growth rate of 2.5%, which may thus not be high enough to lower the unemployment rate given population growth. Shortly after the report, the National Association of Manufacturers said that the economy would suffer considerable damage and potentially lose 6 mln jobs if the fiscal cliff is not averted. Late in the session, UBS said that it would cut up to 10,000 jobs over the next few years.
Oil prices held firm through some of those negative news points and closed higher on the session. That’s positive in and of itself, but there are signs too that prices may be nearing a bottom. WTI has held at the $85/bbl price level, while Brent has made a small rebound from support at the Sep 20th low at $107.10. The likelihood that hedge funds have been closing positions in anticipation of Oct 31st when many of them close their books for the year is one factor that may have offered pressure recently. Friday’s COT data showed that large funds have liquidated 80,770 contracts, or 30.2%, since making a small peak five weeks earlier. Managed money accounts have liquidated 41.3% of their net longs over the same five-week period. While that’s a signal that momentum appears to be on the side of the sellers, the timing within the hedge-fund year-end suggests that prices may rally upon completion of their selling.
More support could come from Hurricane Sandy, if it leads to a surge in product demand. The storm is expected to be pulled through New York on Monday in advance of a cold front. The cold front caused temperatures in Chicago to drop around 30 degrees within 12 hours on Thursday evening, and may thus increase heating demand in the Northeast. The passing of the hurricane could also damage the refinery infrastructure in the region. There’s 1.15 mb/d of capacity in the area of the storm’s projected path. The concern there lies in whether refinery operations are shut down in advance of the storm or if an unplanned shutdown takes place if power is lost. Finally, a demand surge is also typical in front of a storm’s approach as consumers make preparations. Total oil demand surged before Hurricane Isaac in late-Aug by 369 kb/d and then fell 174 kb/d and 943 kb/d in the two weeks that followed.
Natural Gas
November futures closed at 3.400 on Friday, which was 3.4 cents lower on the day and slightly below the July 31st high at $3.407. The contract last trades today. December futures closed 5.7 cents lower on Friday. There wasn't much news to go on except for slight warming in midday forecasts, and the market held in a fairly steady range.Despite the small break below $3.407 in the Nov contract, the break wasn't decisive and doesn't provide much insight into near-term direction. The same July 31st high in the December futures will offer support at $3.631 this week. Open interest has fallen slightly during the weakness of the last few days. However, Friday's COT data showed non-commercials gaining 1,906 contracts and managed money buying 2,919. Considering that these traders had been liquidating to a small degree in the last two weeks, the small recovery in their positions may suggest that the market has found an area of balance. With the end of the injection season just four weeks away, the focus may soon turn toward winter heating demand which could thus be supportive for prices. The one issue that we're concerned with though is the flatness of the futures price curve. Only 14 cents separate the December contract from the highest priced winter contract in Feb. That may help to offer a small ceiling on prices in the near-term, but overall, we don't anticipate the market moving too much lower.
Global Economic & Dollar News
- Greece may not be closer to resolution of its bailout extension as was reported on Thursday. The country may need €30.0B instead of the €20.0B reported on Thursday in order to continue its austerity programs over the next two years.
- U.S. Advance GDP was +2.0% in Q3 vs. +1.8% expected and +1.3% in Q2. Government spending increased 3.7% which was the most in three years. Defense spending rose 13.0%. The drought subtracted 0.42% from the overall number through farm inventories.
- University of Michigan Sentiment was 82.6 in the final Oct reading vs. 83.0 expected. It was 83.1 in the preliminary report and 78.3 in Sep.
- The National Association of Manufacturers said that the economy would suffer considerable damage if Congress fails to avert the fiscal cliff. It added that some companies are laying off workers, letting jobs go vacant, and postponing major purchases.
- UBS may cut up to 10,000 jobs, according to the FT. The cutback is in addition to the 3,500 jobs that were cut last year. The timing and the precise number are not yet known, but will take place over the next few years.
Energy News
- The Kirkuk-Ceyhan Oil Pipeline reported an explosion in Iraq on Friday morning. The pipeline was one of two that run between Kirkuk and the export terminal in Turkey. The cause of the blast was not reported.
- Statoil said that it 2013 oil and gas production will fall due to falling output in the U.S. and its sale of fields off the coast of Norway.
- Crude Oil Rig Counts were down 2 to 1,408. Natural gas counts fell 11 to 416 and reached a 13-year low. Horizontal rigs were down 9 to 1,105.
Upcoming Energy Events
Tue - API Inventories (4:30pm EST)
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - Chinese NBS MFG PMI (released Wed evening) Thu - Natural Gas Inventories (10:30am EST)
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.
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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