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Energy Price Outlook
A mid-morning attack by Israel of a Hamas leader yesterday sent the oil market higher, but unless the tensions escalate in the near-term, we would anticipate prices to continue moving lower. The next key support below $84.05 is offered near the $80.00/bbl level. A major source of pressure will be the adjustment in growth expectations following the election and the upcoming fiscal cliff. A continuation of slow growth and possible brinksmanship on the cliff should cause risk to be re-priced and investors to liquidate holdings with capital gains and/or dividends. Fundamental pressure will come from continued elevated levels of oil production and inventories, Tuesday's reduction in global oil demand by the IEA, and relatively steady oil rig count numbers. Support will be offered by improved Chinese oil imports released over the weekend and by reduced shipping rates in the Keystone Pipeline. Yesterday's API numbers were slightly positive relative to expectations for today's DOEs. We would trade the oil market as a negative affair in the near-term.
WTI finished 94c/bbl higher yesterday while Brent closed up $1.35/bbl. News broke about an hour after the NY pit session opened that Israel attacked a car carrying a militant leader in Gaza. The Israeli Defense Force said that Israel is ready to escalate the attack into a ground operation in Gaza if needed, and Hamas said that the strike has "opened the gates of hell." One of the bullish arguments for oil markets in the near-term will depend on whether yesterday's attack leads to a more widespread conflict or not. While that could create some support initially, we think it may be limited, as there isn't much oil produced in the area and it's unlikely that other oil producers will take sides or create an embargo.
Motiva's 255,000 b/d Convent Louisiana refinery experienced a power outage yesterday and could have potentially weighed on Brent, however, the Israeli/Hamas issue ended up boosting the spread overall. Hess's refinery in Port Reading New Jersey announced it was restarting, which may also have boosted the Brent market.
The de-risking that's taken place since the election has forced the Dow 5.1% lower and is likely to pressure energy markets. Last week, there appeared to be somber reflection by both political parties and expectations that both sides would cave on the fiscal cliff issue to reach an agreement. That hasn't been the case so far this week, however, as discussions about going over the cliff have taken place. The president met with union leaders on Tuesday and business
leaders yesterday, but did not invite any bankers. He also is reported to want $1.6T in new tax revenues over 10 years, which is double the figure that Speaker Boehner agreed to in the summer 2010. At a press conference yesterday, he did not appear to extend an olive branch to republicans, saying twice that the American people knew what they were going to get when they reelected him. He discussed higher taxes yesterday but not spending cuts, and seemed to suggest that in exchange for tax increases, he would only commit to discussing entitlement reform. The Dow fell 185 points yesterday partly on the Hamas attack, but also on the potential brinksmanship in Washington. Oil should follow eventually. Investors will likely continue to book capital gains before year-end and/or sell dividend stocks to avoid higher tax rates. A reduction in the incentive to invest will signal that the economy will slow.
Natural Gas
December futures settled 2.1 cents higher yesterday due to cooler weather forecasts. Cooler weather though is still confined mostly to the southeastern part of the country, as NOAA maps show above-normal temps engulfing all areas outside of the southeast. Technicals may have played a role once again, as traders who didn't buy Tuesday's advance back above the 50-day MA attempted to do so yesterday. Now that the market is closer to the top end of the range rather than the bottom, however, the impetus to buy should diminish unless today's inventory number shows a sharper-than- expected decline. Consensus inventory forecasts have been revised down in the last few days, going from -8 bcf on Monday to -13 bcf on Tuesday, and to -24 bcf as of yesterday afternoon. The EOXLive estimate is -19 bcf. It's difficult to anticipate much more strength occurring in the market given the currently above-normal temperature forecasts. Rallies near $3.90 in NGZ2 may become an attractive selling point.
Global Economic & Dollar News
- Japanese PM Noda set snap elections for the lower house for Dec 16th. Potential successor Shinzo Abe called for unlimited printing of money in order to achieve new inflation targets.
- The IMF may give way to the EU's demand on Greece, according to the WSJ. The demand is for the 120% GDP target to be delayed to 2022 from 2020, and would allow the release of the next tranche.
- Eurozone Industrial Production was -2.5% m/m in Sep vs. -2.0% expected and +0.9% previously.
- U.S. PPI was -0.2% m/m in Oct vs. +0.2% expected. The decline was made due to a seasonal adjustment to vehicle prices where quality adjustments are made in October. Vehicle prices fell 1.6%.
- U.S. Retail Sales were -0.3% m/m in Oct vs. -0.2% expected.
- Treasury's Geithner insisted late Tuesday that tax rates will need to increase and said that simply capping deductions will not be sufficient to increase revenue.
- President Obama may demand $1.6T in new tax revenues, which is nearly double the $800B that was agreed to in the 2011 negotiations with Speaker Boehner. Reports suggest that he committed to union leaders on Tuesday to hold firm on this demand.
Energy News
- A Militant Leader in Gaza was killed by an Israeli air strike yesterday. Hamas responded by saying that the airstrike has "opened the gates of hell." The Freedom and Justice Party (FJP) responded by saying that the death was a crime that requires international action. The FJP is an arm of the Muslim Brotherhood. The Israeli Defense Force said that Israel is ready to escalate the attack into a ground operation into Gaza if needed.
- Motiva's Convent Louisiana Refinery shut down yesterday after a power outage affected operating units. The refinery's capacity is 255,000 b/d.
- Hess's Port Reading NJ Refinery began restarting yesterday after being damaged by Hurricane Sandy. Production at the 70,000 b/d facility should resume by the end of the week.
- Pres Obama said that he will discuss climate change more in coming months and years, and plans to hold talks with scientists. He added that a carbon tax lacks political consensus.
Upcoming Energy Events
Thu - Natural Gas Inventories (10:30am EST) Thu - EIA Weekly Oil Inventories (11:00am EST) Tue - Eurogroup meeting on Greece
Tue - Bernanke Speaks
Tue - API Inventories (4:30pm EST) Dec 12th - OPEC Meeting
Dec 12th - FOMC Meeting and Press Conference
Analysis
EIA Inventory Preview
Crude oil stocks are anticipated to drop 0.5 MB this week compared to a 1.3 MB decline in the five-year average. The biggest factor in this week’s numbers will be refinery utilization, in our view, as it was the most significant in last week’s inventory increase. Seven refineries were shut or went to reduced rates in that week due to Hurricane Sandy and five returned to full processing rates last week. The return of refining should reduce inventories as more oil is processed. Imports were surprisingly higher last week and grew the most on the east coast despite the storm. It’s difficult to assess the import situation this week when the closure of ports in NY led to increased imports while the reopening of the Keystone pipeline in the Midwest led to a decrease in PADD 2. Gasoline inventories benefited from Sandy in last week’s report by gaining 2.9 MB. The east coast fell 1.2 MB while the Gulf Coast saw the largest increase of 4.6 MB, likely due to the shutdown of the Colonial pipeline. The restart of that pipeline along with the inability of refiners to deliver gasoline to end-users could lead to another build this week of 0.8 MB. Distillate inventories could grow as well and we’re looking for a build of 0.5 MB.
Natural gas inventories are anticipated to fall 19 bcf this week, compared to a five-year average build of 17 bcf. The predicted draw would end the injection season two weeks early. Such a reduction in inventories may not appear to be in- line with the above-normal temperatures that were forecast by NOAA during the last two weeks, however, stronger demand for heating likely took place in the eastern population-weighted consumption areas where cooler temperatures were observed. A 19 bcf draw would put inventories at 3,910 bcf, and would make last week’s reading of 3,929 bcf a record high for the year. That would be only 77 bcf above last year’s record, and end the injection season with a much smaller surplus than was feared earlier this year. It could become a bullish catalyst later this week.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day’s API figures
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.
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