Energy Price Outlook
Oil prices have held within a roughly $2.50/bbl trading range in the past seven days since the initial post-election $4.27/bbl washout on Nov 7th. While the Israel/Gaza conflict has been supportive for the market, it has only been a factor in the last two days of last week. Given the inability to fall on negative news and now the bullish developments in the Middle East, it's tough to determine whether the next move in crude will be up or down. We still lean toward the downside in our bias, but it's very tentative. Pressure will be offered by high levels of oil inventories, an 18 1/2 year high in U.S. oil production, weakness in economic data, and weakness in the stock market. The bullish case rests on the inability to fall, as well as on the potential for escalation of the conflict in the Middle East.
The new front-month January WTI futures settled $1.05/bbl higher on Friday, with the expiration of the December contract helping out the front months. The oil market didn't seem to be concerned about the Middle East on Thursday as WTI fell 87 cents, but it certainty was on Friday. Crude traded slightly lower overnight as a cease fire took hold in the Middle East. A rally began at around 7:45 am EST when news of a long-range rocket headed for Tel Aviv broke and thus broke the cease fire. The rocket landed in the sea, but shortly thereafter, Israel announced that it had begun drafting 16,000 troops and could call up as many as 30,000. Iraq's representative to the Arab League said that oil should be used as a weapon, but the comments were dialed back shortly thereafter, possibly due to pressure from countries more friendly to the U.S. It's difficult to assess the potential impact of this on the oil market. The countries affected don't produce much oil, and Saudi Arabia could help by making up for any shortfalls. Additionally, the parties involved may be fearful of a repeat of the Israeli operation in Gaza in December 2008 where 1,100 Palestinians and 12 Israelis were killed.
Worries about the fiscal cliff added pressure to the market through the first half of the day, before a short press conference took place around 11:40 am EST. Congressional Leaders said at the briefing that talks were "constructive" and "productive." Harry Reid said he's not in favor of waiting until the end of the year. Economic advisor Gene Sperling suggested at a separate briefing that any fiscal deal would require "well over $1T in revenues." The statement may have been a softening of the approach Pres Obama took earlier in the week where he demanded $1.6T in new taxes. Sentiment following the 11:40 press briefing completely changed from what was witnessed earlier in the week. By the same token though, the Dow went from 71 points lower at its bottom to 46 points higher at the close. Prices are still 657 points below their pre-election close and signal that the market may still be re-pricing a higher tax and/or slower growth environment. That could weigh on energy markets as well.
Natural Gas
December futures ended 8.7 cents higher on Friday, with forecasts for below-normal temps in the eastern half of the U.S. over the next 11-15 days offering support. The forecast was made by Earthsat and was supported by NOAA's latest maps which shown the area of below-normal temps in the Southeast expanding compared to Thursday's map. Some support was also given by the CPC's long-range forecast which showed that temps in Dec-Jan-Feb may be below-normal in the northern plains and above normal in the south and southwest portions of the country. The outlook was colder than forecast previously, and caused heating demand expectations to be increased.
We discussed selling rallies in Friday's report near $3.90. This week's trade may seen an inventory build based on warmer temperatures that dominated, and push prices lower. However, the shift on Friday toward a colder dynamic could argue for the positive case at least by week's end if not sooner. We'd trade gas as a neutral affair during this week.
Global Economic & Dollar News
- A Cease Fire Proposed by Egypt was violated by militants in Gaza, who fired more rockets while the Egyptian prime minister was in the country. It lasted only three hours. Israel said it has begun drafting 16,000 troops and may call up as many as 30,000, which is a precursor to a possible invasion. The action has so far killed 22 Palestinians and 3 Israelis.
- Iraq's Representative to the Arab League said on Friday that Arab states should use oil as a weapon to put pressure on the United States and Israel over the attacks on Gaza. That statement was later dialed back a bit to say that no specific actions would be proposed.
- The Budget Sequester may be replaced with a short-term plan, according to White House officials.
- Economic Advisor Gene Sperling said that any fiscal deal would require "well over $1T in revenues." The statement may have been a softening of the approach Pres Obama took earlier in the week where he demanded $1.6T in new taxes.
- Industrial Production was -0.4% in Oct vs. +0.2% expected and +0.2% previously. The Fed said that Sandy cut output by almost 1 percentage point.
- Congressional Leaders said at a press briefing following talks on the fiscal cliff that talks were "constructive" and "productive." Harry Reid said he's not in favor of waiting until the end of the year.
Energy News
- An Offshore Oil & Gas Platform owned by Black Elk Energy caught fire off the coast of Louisiana. Two were killed and two are missing in the incident. The platform was not producing oil at the time.
- The IAEA said that Iran is doubling production enriched uranium to make a nuclear weapon.
- Natural Gas Rig Counts increased 4 to 417 while oil gained 1 to 1,390. Horizontal rigs were up 1 to 1,105.
Upcoming Energy Events
Mon - Existing Home Sales, NAHB Survey
Tue - Eurogroup meeting on Greece
Tue - Housing Starts, Bernanke Speaks (12:15 pm EST) Tue - API Inventories (4:30pm EST)
Wed - EIA Weekly Oil Inventories (10:30am EST) Thu - Natural Gas Inventories (10:30am EST)
Fri - German IFO Business Climate
Dec 12th - OPEC Meeting
Dec 12th - FOMC Meeting and Press Conference
Analysis
EIA Inventory Preview
Whatever the result of Wednesday's inventory numbers is, the key indication will likely be the comparison of oil inventories with their five-year average. That increased to 44.33 MB above the average in last week's report, which was the highest in two years. We look for a decline this week that's in-line with the five-year average drop of 0.7 MB. The DOE's figure is still some 2.9 MB above that of the API, which will offer pressure, as will increased refinery output. Most refineries in the Northeast have ramped up to normal output levels with the exception of Hess's 70 kb/d and Phillips 66's 238 kb/d facilities. Hess began restarting late last week, while the latest on Phillips 66 is that a restart is expected between Nov 19th-26th. Some boosting effect on inventories could come from demand, where a slight pullback is possible after last week's surge. Demand will be difficult to predict, however, as reverberations from Sandy are still occurring. Gasoline demand should stabilize too, which could help stocks increase 1.0 MB this week. Gasoline imports could maintain a recovery from Sandy and show another increase. Distillate inventories typically show a decline this week before rebounding through year-end. That could certainly be the case again, as demand has already recovered in the wake of Sandy.
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.
You must be logged in to post a comment.