Published October 24, 2012
Energy Price Outlook
The oil market may continue its short-term correction in the near-term, but it's also entering a support range between $81.00 and $85.00/bbl. We think that the rate of decline will slow in the near-term, as some of the impulsive selling and weak longs exited the market during Monday's session. Yesterday's FOMC announcement may pressure the market as the committee did not announce any further easing measures and also produced a statement which showed little evidence of economic recovery. That could cause prices to drift slightly lower over the next 1-2 weeks until clarity on the election and the fiscal cliff are received. Oil prices may also fall due to high levels of oil inventories and oil production, as well as relatively weak demand. We would trade WTI as a negative affair this week and then look for prices to eventually stabilize in the $81.00-$85.00/bbl range. A hold in the Dow near 13,000 support would assist oil prices in forming a bottom (psychological support, the Sep 4th low, and the 200-day MA).
Dec futures settled 94 cents lower in WTI and 40 cents lower in Brent. Oil prices were slightly higher in the overnight session, but reversed into negative territory around the time of the NY session open. The selloff continued through the weekly inventory report and ended around lunchtime, where a small recovery was then initiated into the close. It was really a mixed day from a news perspective, where mild "risk-off" selling took place and economic data was mixed. The Eurozone PMI and German IFO climate surveys both showed weakness, while a defense of the OMT to the German parliament by ECB's Draghi appeared to go successfully. An increase in the Chinese PMI number received a lot of attention even though it was still below the 50.0 level of expansion/contraction. There were also favorable comments made on China from Caterpillar and United Technologies, which called it an area of stability in conference calls Tuesday. In oil news, support was taken from Nigeria's cut in production of 500,000 b/d due to flooding. That was countered by a report that Iraq will boost its exports from Kirkuk in November, and from a report that North Dakota's oil production may surpass that of Qatar by the end of the year.
The mixed nature of news yesterday was capped off by a steady Fed statement following its meeting yesterday. The statement read as though the economic mediocrity of the last couple years is likely to continue, and that doesn't create any desire to rush in to buy energies. Phrases like "moderate pace" of economic growth, "slow growth" in employment, and business investment "has slowed" provide a disconnect between what the Fed is observing and the actions it has already taken. Though three rounds of QE, Operation Twist, and clarity in language have been implemented since 2008, it has yet to create any lasting spark for economic growth. Fear about debt monetization has drawn investment into commodities in recent years, however, that even feels a bit drawn out at this point.
Yesterday's total demand figures declined and refineries appear unwilling to boost output either due to adverse foresight on demand or weak refinery margins. Crude oil stocks are 40.80 MB above their five-year average while gasoline and distillates are 35.25 MB below. That may seem like a state of balance, and unfortunately appears to be one that will continue to linger for some time. Distillate inventories improved relative to their five-year average but only slightly. Low levels of refinery output combined with upcoming seasonal growth in demand could keep that spread wide for some time, and thus bolster heating oil prices especially against gasoline.
Natural Gas
Both Nov and Dec futures settled 8.5 cents lower yesterday and unwound the majority of Tuesday's 8.3/9.3 cent rebound. Pressure came from a small ratchet up in expectations for today's inventory figure, which is currently at a consensus of
+67 bcf and thus above the 65 bcf increase shown in the five-year average. Pressure also came from WSI's winter forecast published late on Tuesday, which said that El Nino warming of the Pacific Ocean is not taking place and that temps in the Eastern half of the country may be above-normal by two degrees from Nov through Jan. The Northwest U.S. could be below-normal rather than above-normal as is usually the case during El Nino winters. The forecast said that the winter may be more similar to a La Nina event than El Nino. Early-season heat demand may be weak on such a forecast, and thus pressure the gas market.
While the inventory figure will be a central focus of today's trade, we believe that the market may also still be looking at technical factors for potential support. Nov futures are consolidating above the July 31st high at $3.40, while the Dec contract has traded steadily higher. Open interest decreased 11,000 contracts on Monday when the market fell 18 cents, but it increased 3,000 on Tuesday when prices rallied more than 9 cents. We think it shows that investors are still buying on dips, and could keep the market buoyant in the near-term. We would look for the sideways-to-higher trend to continue in NGZ2 this week and for prices to eventually re-test the $4.00 level.
Global Economic & Dollar News
- China's HSBC MFG PMI was 49.1 in Oct vs. 47.9 previously. There were no estimates. It was the second consecutive increase, however, was still below the 50.0 line of expansion/contraction. It was the 12th month below 50.0.
- Eurozone Flash Composite PMI was 45.8 in Oct vs. vs. 46.5 expected and 46.1 previously.
- German IFO Business Climate was 100.0 in Oct vs. 101.6 expected and 101.4 previously.
- ECB's Draghi defended the OMT program to the German parliament. He discussed removing doubts about the future of the euro as a way to restore the transmission of monetary policy. He said that the way to do that was to prevent the development of disaster scenarios.
- Spain May Request Aid soon, and receive up to €50.0B by end-Nov and additional aid in early-2013.
- Greece may get another two years to fix its budget problems, according to a Germany newspaper.
- U.S. New Home Sales were +5.7% to 389K vs. 385K expected and 368K previously (revised down from 373K).
- The FOMC repeated its pledge to keep rates "exceptionally low" through 2015 and said it will continue buying $40B in MBS per month. It will also continue Operation Twist trough year-end. The statements on other economic indicators was relatively unchanged.
Energy News
- Iraq will boost its exports from Kirkuk to 24 cargoes in November from 20 in October, according to loading programs.
- Nigeria's Exports will be cut by 500,000 b/d due to flooding, according to the Department of Petroleum Resources. Production has fallen to 2.1 mb/d from 2.6 mb/d.
- North Dakota's Oil Production may surpass Qatar by the end of the year, according to the Center for Global Energy Studies.
Upcoming Energy Events
Thu - Durable Goods Orders
Thu - Natural Gas Inventories (10:30am EST) Tue - API Inventories (4:30pm EST)
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - Chinese NBS MFG PMI (released Wed evening)
Analysis
EIA Inventory Review
The EIA's weekly inventory data pressured energy markets yesterday, as most headline numbers were reported above expectations. Crude oil fell nearly $1.00/bbl as a 5.9 MB build was more than 4.0 MB above consensus. Increases in imports and domestic oil production helped the number to gain, as did a drop in the volatile demand component. Refinery utilization actually fell despite a seasonal tendency to gain through year-end. The implication may be that refiners' demand forecasts aren't very favorable at the moment, which is negative for energy prices. For a second week, the numbers were bearish on balance, and failed to move the needle in terms of reversing the downtrend. The data and our analysis follow below.
Crude oil inventories gained 5.9 MB vs. an increase of 1.8 MB expected. The build put inventories at 40.80 MB above the five-year average compared to 36.58 MB above it last week, and compares to the largest divergence this year made in the w/e June 22nd at 42.08 MB (chart 1). Helping the increase was a 476 kb/d gain in imports, which are now at 8.82 mb/d and in the middle of the range over the last two years of 7.6 mb/d to 9.9 mb/d. Domestic oil production gained 4 kb/d on the week and remains at 17-year highs. A drop of 0.2% in refinery utilization contributed to inventories too, and equated to 30 kb/d or 210,000 bbls over the course of the week. Utilization typically bottoms in the w/e Sep 21st and gains 2.0% through the current survey week. This year, however, utilization is actually 0.2% lower than it was in the w/e Sep 21st. That's not only the result of weak refinery margins but also perhaps a sign that refiners don't anticipate demand growing anytime soon. That was shown yesterday by a demand drop of 383 kb/d (+205 kb/d in the four-week average).
Gasoline stocks were +1.4 MB vs. +0.5 MB expected. The increase was made despite a 57 kb/d loss of refinery production on the week which should have shrunk inventories. Instead, demand was a bigger factor, and fell 236 kb/d, and is 378 kb/d below the five-year average vs. 324 kb/d below it last week. Inventories are 5.19 MB below the five-year average vs. 7.29 MB below it last week.
Distillate stocks were -0.6 MB vs. -1.2 MB expected. Falling demand was reported in distillates too, where it was down 236 kb/d on the week. That may have helped the number be reported above consensus. A production loss of 102 kb/d actually took away from stocks, but wasn't enough to counter the loss in demand. Distillate stocks are 30.07 MB below the five-year average vs. 30.97 MB below it last week.
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
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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)
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