Energy Price Outlook

Oil prices may trade lower in the near-term, as Monday’s action failed to respond to moderately favorable developments. There was support for yesterday’s trade given by the bottom of a rising channel pattern at $86.20 and from a recovery in economic data from China and Germany. However, an uninspiring trade in the stock market and a lack of progress in fiscal cliff talks added on to other negatives such as growing U.S. oil production, building levels of gasoline stocks, weak oil demand, and a likelihood that OPEC leaves output unchanged tomorrow. Increasing numbers of quotes are likely from OPEC ministers today, and will make the results of tomorrow’s meeting virtually known. We shifted our bias from negative to neutral on Friday in anticipation of a small recovery, but favor returning it to the negative side today. WTI could retest the Nov low at $84.05 while Brent could fall toward the Nov 5th low at $104.76.

 

WTI finished 37c/bbl lower yesterday while Brent gained 31c/bbl. Oil prices firmed throughout the overnight hours on the back of better data from China and Germany. Chinese industrial production and CPI data showed that the economy expanded without creating too much inflation. China’s trade data revealed that the country’s oil imports improved for the third straight month and reached the third highest level on record on a barrel per day basis (chart 1 below). The recovery in imports signaled that the economy continued to improve, as did a report that electrical output was +7.9% y/y. Electrical output correlates strongly with GDP, and also implies that the Chinese economy is recovering (chart 2). German export data improved and also suggested that the global economy recovered slightly. A third positive factor was Friday’s COT data, which showed that non-commercials added 13,799 contracts while managed money traders added 13,981.

 

 

Support from these factors evaporated as the morning progressed, and WTI gradually fell into negative territory. WTI closed below the bottom of a rising channel pattern at $86.20 which suggests that further weakness will transpire. The stock market may have been a small drag, as the S&P 500 held between 0 and 2 points higher throughout most of the session. The focus may also be changing toward tomorrow’s OPEC meeting and the likelihood that many participating oil ministers will make comments today. Saudi Arabia’s al-Naimi suggested last week that prices were comfortable and the market well supplied. A change in production quotas is not expected and doesn’t always mean much for prices anyway. The civil war in Libya two years ago didn’t create a quota adjustment, as members with spare capacity such as Saudi Arabia just produced more. OPEC production has fallen about 1.0 mb/d in the last four months to 28.169 mb/d due to seasonal Q4 declines in demand. Production has fallen broadly across Saudi Arabia, Kuwait, Algeria, Angola, and Libya. Production could increase again early next year, so a maintaining of quotas will likely add pressure to the oil market.

 

Natural Gas

January futures settled 9.1 cents lower in yesterday’s trade, with front month futures contracts performing much worse than the back months. Weather was the dominant issue yesterday, as the market is trading in contango all the way through Jan ’14 rather than the typical structure where the winter ‘13 contracts trade above the summer ’13 months. Near- term weather prospects appear to be above-normal, as the 8-14 day forecasts over the weekend showed mostly above- normal conditions except on the east and west coasts. The Monday afternoon update brought back the below-normal area on the west coast that was a highlight of Friday’s forecast (charts below). The weather related selloff pushed prices below key support from the 50-day and 200-day moving averages at $3.52 and $3.59, and beneath the low made last week at $3.507. The selloff stopped us out of a long recommendation entered Friday at $3.55 with a risk at $3.50.

 

It’s difficult to get too bearish though, as prices may soon be low enough to see comparisons with coal once again. On a btu basis, coal prices are currently the gas-equivalent of around $3.17/mmbtu. Production shut-ins could become prevalent again, as oversupply is the dominant headline. The market may also be encouraged by last week’s DOE report which made it likely that LNG export permits would be issued. Sempra Energy filed with the DOE yesterday to build an LNG export facility at its existing Cameron LNG terminal in Louisiana. The facility is planned to export 1.7 bcf/day by 2017. We think that prices could fall slightly further over the next day or two before stabilizing around Thursday’s inventory number. Consensus is currently around +1 bcf and our estimate is -5 bcf. If there is indeed a draw, it could catch the market leaning too negative.

 

 

Dec 19th - Last Trade Jan WTI

 

Analysis

EIA Inventory Preview

The EIA is expected to report a decline in oil inventories of 3.0 MB this week. Going into year-end, refiners appear to be more willing to reduce inventories than we had expected last week. There's an issue typically, whereby holders of inventory usually want higher priced oil that's been added late in the year off the books in order to show that costs are being held. Given that prices have been trending lower throughout most of this year, we had expected little incentive to liquidate inventories. Utilization gained 2.0% last week to reach the highest level since late-Aug and ran counter to typical trends. It's currently 4.6% above the five-year average compared to 2.1% above it at a low point just one month ago. That suggests that refiners are in fact interested in reducing oil stocks into the end of the year. Imports are always difficult to predict, however, they do trend lower through year-end and may also pressure inventories. Another key metric in this week's data will be the level of demand, as it has fallen 1.1 mb/d in the last two weeks. A lack of demand could help to elevate inventories, as refiners have little incentive to produce product. Indeed, WTI refinery margins are near their lowest of the last 9 months at $27/bbl while Brent margins are around the $6/bbl level. Product stocks gained sharply last week and could see significant increases again this week due to high utilization. Gasoline could increase 4.0 MB while distillates may rise 2.0 MB.

 

Natural gas inventories could fall around 5 bcf this week, as temperatures were very warm compared to normal. This is the survey week that includes the 70+ degree readings in the Midwest on December 3rd, which is causing some models to forecast a build in stocks this week. The HDD reading rose to 120 during the survey week and compared to 160-165 previously, which causes our model to forecast a small draw of 5 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)

 

 

 

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.

 

 

 

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