Energy Price Outlook
The weak tone of yesterday's session indicates that oil prices may move toward the lower end of the two-week consolidation near $89.00 in the near-term. Focus will be on DOE inventories and ADP payrolls today, which may offer modest pressure. Pressure could also come from a lack of investment moving into energy markets at the start of Q4, concerns over global growth, and a slow pace of reform in Spain and Greece. Support may be found from favorable car sales reported yesterday, and relative strength in the euro. We'd look for prices to test support at $88.95 (Sep 26th low) over the next few days.
Yesterday’s action was mixed but finished slightly lower, with the market closing below resistance from the 50-day MA once again. WTI ended 59 cents lower while Brent finished 62 cents on the downside. The market received support initially from a report that Spain would ask for a bailout as early as this weekend. That was later countered by Germany and then by the Spanish PM himself who said that a request was not imminent. The early “risk-on” rally turned into a “risk- off” decline, but activity was relatively uneventful. The market traded in a small $1.32/bbl trading range on light volumes.
The market may remain two sided in the near-term as it faces conflicting fundamental and economic data. API inventories were reported yesterday afternoon and appeared to be fairly neutral on the surface. However, in order to converge with the API, today's DOE numbers could potentially be bullish for crude and bearish for gasoline. Focus will also be on the ADP payroll data due before today's open. Last month's report soared to +201K, so there could be a pullback today. Expectations are +140K, but the manufacturing PMI data so far argue against a good number today. Friday's non-farms are expected to be +115K.
In addition to potentially lackluster payroll growth, the market will also focus on a lack of investment moving into energy markets at Monday's start of Q4. WTI is down 30 cents/bbl so far, and open interest on Monday was up just 3,000 contracts. Friday's COT data showed a liquidation in non-commercials of 35,854 contracts and in managed money of 38,372 contracts. Economic data overseas is slightly negative too, with the RBA cutting rates yesterday by 25 bps. They have a good gauge of China, and the cut indicates that China may be continuing to weaken.
Of course the flipside is that the euro continued to rally yesterday for a second day, and an intermediate-term uptrend has been in place in the currency since a bottom in late-July. Weakness in the dollar makes oil appear more affordable to non- dollar based consumers and could support global demand. Support could also come from yesterday's auto sales reports for September. The annualized rate for total vehicles was 14.88M vs. 14.46M in Aug, with Chrysler and Ford reporting their best sales in four years. These factors indicate that WTI may find support at $88.95 if it were tested in the near-term.
Natural Gas
The market traded in a V-shaped pattern yesterday, with prices falling 8.2 cents at the day’s low. A rebound began shortly after the NY session opened, and the market closed 5.1 cents higher. Pressure came early from technical selling following a test of the $3.50 psychological level on Monday and in yesterday’s overnight session. Some talk about switching back to coal also made the rounds yesterday, as gas prices have become too expensive by most measures relative to coal. Coal prices have rebounded to around $54/ton from $52/ton in the past week, but that still puts coal at a $2.75-$3.40/mmbtu equivalent gas price by our calculations (chart below). Technicals also played a role in the early weakness, as the last two days have been pressured by psychological resistance at the $3.50/mmbtu level. Further worries about technical pressure could come from Monday’s breakout above the July 31st high at $3.407. Yesterday’s trade consolidated above that level and opened up the possibility of a bull trap pattern being created. Such a pattern usually occurs after a consolidation lasting a few days is made above an old resistance level, and is followed by a sharp fall back below it. Such a potential pattern could offer pressure today.
The market was also pressured by a long-range forecast from MDA Earthsat, which said that the winter may be the second in a row to produce low energy demand for heating even though temps may fall short of the record high temps of the 2011-2012 season. It said that December may be the warmest of the three winter months, with most of the U.S. experiencing above-normal temperatures. February may be the coolest, with seasonal temps across most of the country and below-normal readings from North Carolina to Florida. While the long-range forecast pressured the market early, the rebound in the NY session was blamed on short-term forecasts showing cooler temperatures over the next week or two. That’s been evident in NOAA’s long range forecasts already, but the front-end of the futures curve traded as if it were a surprise.
We’re maintaining our view from yesterday’s comment that the recent strength has been tied to short-covering. Open interest shows that 210,000 contracts were closed since the April bottom while prices have rallied $1.55. Long-term bottoms are rarely made on short-covering, so while the rally may continue in the near-term, we don’t think it will last long. Panic buying by shorts can occur when technical resistance levels are removed, but that buying eventually dries up and ends. The market begins to flatten starting Oct 12th and it falls starting Oct 26th according to seasonal patterns. Those may be two additional arguments in favor of a peak being formed in the near-term.
Global Economic & Dollar News
- Australia’s RBA announced a surprise cut in interest rates of 25 bps to 3.25%. It was the third cut since May.
- A Spanish Bailout may be requested as soon as the weekend, according to Reuters, however Germany is urging Spain to wait. Spanish newspapers said a request will not come this weekend.
- Moody’s said Spain needs as much as €105B to recapitalize its banks, which is almost double the €59.3B revealed last week.
- Chrysler’s Sep Sales were +12% vs. +6.3% expected and were the best Sep sales in five years.
- Ford’s Sales were -0.2% in Sep vs. +2.3% expected.
- GM’s Vehicle Sales were +1.5% vs. +2.8% expected.
- The Fiscal Cliff is being dealt with by the Senate, according to the NYT. Leaders are closing in on a path for dealing with the cliff that will use the lame-duck post-election session rather than passing a short-term solution or extension.
- Domestic Vehicle Sales were reported at 11.49M for Sep vs. 11.40M expected and 11.54M previously. Total sales were 14.88M vs. 14.46M previously.
Energy News
- Al-Qaeda’s Zawahiri is preparing a number of terrorist attacks before the election, according to Debka. The al-Qaeda leader wants to repeat his Libyan success and capitalize on upheaval across the Middle East.
- Eight Forties Cargoes have now been deferred due to production problems.
- Iraq’s Oil Output has been boosted to help meet global demand, according to a government advisor who also said that Iraq is happy with the current price.
- Russian Oil Output increased to a post-Soviet record of 10.41 mb/d in Sep. The peak during the Soviet era was 11.48 mb/d set in 1987.
- BP Restarted its 80,000 bpd crude unit (Pipestill 11A) and isomerization unit at its Whiting Indiana refinery. The crude unit was shut on Aug 1st as part of an effort to convert the refinery to processing heavier crudes. Its largest crude unit (Pipestill 12) is rated at 336,000 b/d and will be shut on Nov 1st for 100 days of work.
- Canadian Natural Resources is planning work on its Horizon upgrader this month. Work will be done on heat exchangers and mechanical seals which have been scheduled for Q3. Syncrude prices outperformed WTI by about $2.00/bbl on the news.
Upcoming Energy Events
All Week - China's Golden Week Holiday. Stock mkt closed til Oct 8th
Wed - Chinese Non-MFG PMI (Tue night) Wed - ADP Payrolls, ISM Non-MFG PMI
Wed - EIA Weekly Oil Inventories (10:30am EST) Wed - FOMC Minutes, Romney/Obama debate Thu - ECB, BOE Meetings
Thu - Natural Gas Inventories (10:30am EST) Fri - German MFG Orders
Fri - U.S. Employment Report
Tue - API Inventories (4:30pm EST)
Analysis
EIA Inventory Preview
Oil inventories are expected to build 0.5 MB this week, which is close to the five-year average gain of 0.6 MB. This week's numbers may have several undercurrents to them, however, they may even out and be reported close to the average. Supporting inventories should be a recovery in imports, which fell 2.25 MB last week and approached the lowest levels of the past two years. Imports may have been pressured last week by accounting reverberations associated with Hurricane Isaac, as imports were up 1.81 mb/d in the prior two weeks. Oil production fell 772 kb/d in the week that Isaac passed, but have since increased 1.02 mb/d in the last three weeks. We don't think that the recovery was greater than the loss due to accounting here, but instead may be the result of higher shale production. Weak demand may boost inventories too, as the four-week average has lingered around 1.15 mb/d below the five-year average. Subtracting from inventories could be an increase in refinery utilization, as it tends to bounce higher through year-end after last week's seasonal bottom. Still, a dragging force on utilization is the relative low levels of profit margins based on Brent crude prices. They are still around $12/bbl compared to $33/bbl for WTI.
Product inventories may fall again this week, as weak refinery utilization and falling demand reduce the appetite to produce more products. Distillate stocks typically begin falling this week after reaching a seasonal peak in last week's data.
Natural gas inventories may increase 67 bcf this week, as HDDs surpassed CDDs for the first time since May 17th. It comes a week earlier than last year, which indicates that the area of cooler-than-normal temps that engulfed the eastern and upper Midwest parts of the country created more demand for heat than is normally the case. Temps were above- normal in the western half of the country, which likely added to cooling demand. A build of 67 bcf would be significantly below the five-year average increase which could be a positive for prices going into the report. The biggest risk is that similar HDD and CDD observations were made a year ago, and inventories gained 97 bcf.
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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