Energy Price Outlook
Today’s trade will focus on the employment report for guidance on the “risk-on, risk-off” trade, and will also keep an eye on the presidential election next Tuesday. Volumes are light due to election uncertainty as well as the recovery from the hurricane in the Northeast. The oil market appears to be supported in general, and we expect near-term trade to remain that way. The start of the month yesterday created a favorable environment for asset allocation, and will back up support from other sources such as technical factors, the restart of Northeast refineries, and improved economic data yesterday. The downside will look to the slow distribution of oil products in the Northeast due to power outages, the scheduled maintenance shutdown of BP’s Whiting IN refinery, and elevated levels of oil production and inventories. We still favor buying a break in Brent at $107.50 and risking below the recent low at $106.50.
Today’s focus will be on the employment report, where expectations are centering on a 125K increase and a 0.1% gain in the unemployment rate to 7.9%. Indications from the manufacturing surveys were mixed, as both Tuesday’s Chicago and yesterday’s ISM surveys showed declines in their employment components but both components held above the 50.0 level of expansion/contraction. Initial claims numbers have been somewhat favorable over the last two weeks. It may not be a surprise to see an increase in the unemployment rate after the sharp 0.3% decline last month, but the overall message of the report is expected to be one that shows slow economic activity and employment gains that fall short of matching population growth.
The WTI market broke out above the top of the sideways range of the past six days at $86.75 on a closing basis. That could draw additional investment into the market, and has already been signaled by gains in open interest. Since Oct 24th, the market has gained 51 cents while OI has increased 26,000 contracts.
While we expect gains to be made in WTI in the near-term, heating oil is not looking as good. We had expected that low inventories of distillates on the precipice of the winter demand season would offer support for heating oil especially against gasoline. However, gasoline prices have rallied on Hurricane Sandy with some traders attempting to take delivery of Wednesday’s expiring Nov contract. They may be unable to do so because fuel racks are lacking power. But we’re concerned that heating oil prices have been unable to strengthen in the last two weeks. Another wrench in the story came in yesterday’s inventory report, which showed the inventory gap with the five-year average shrink to 29.28 MB below from 30.07 MB below last week and 30.97 MB below at a peak two weeks ago. As we noted in our year-end outlook a few weeks ago, there were three previous occasions when inventories were around 25 mln bbls below the five-year average.
In all three occasions, heating oil prices strengthened until about two weeks after a reversal took place.
The market closed 0.7 cents higher in Dec futures yesterday, within a relatively range-bound session. The market received a small boost from the 65 bcf increase in inventories, which was below the consensus for a 67 bcf gain. The market also received support from the return of electricity generation in the Northeast U.S., where 4.7 mln customers were without power yesterday compared to 6.1 mln on Wednesday and 8.1 mln on Tuesday. Nuclear generation increased 129 MW yesterday to 70% of capacity. Finally, Exxon reported that its production fell 5.2% y/y in Q3 to 3.712 bcf/day. The company said that some of the decline was the result of shifting output from gas to liquids reserves.
With the demand picture slowing returning to normal in the Northeast, and with the winter withdrawal season just three weeks away, we expect prices to remain firm. Key support at the July 31st high at $3.631 in Dec futures should hold. The 50-day MA is about 10 cents below that level and will offer additional support. If inventories build at a rate equivalent to the five-year average, they would reach 3.964 tcf. That would be a new record by only 112 bcf and would be 275 bcf below the limits of storage capacity.
Global Economic & Dollar News
China’s Official MFG PMI matched expectations at 50.2 and gained slightly from 49.8 previously. It was the first reading above 50 since May.
Greece released a budget yesterday which showed projections that exceeded worst-case scenarios. The projections make it unlikely that the country will reduce its debt load to 120% of GDP by 2020.
ADP Payrolls were +158K in Oct vs. +131K expected. Last month was revised down to +114K from +162K as part of Wednesday’s announcement of a revised larger sample and new methodology.
Initial Claims were 363K vs. 370K expected while last week was revised up 3K. Continuing claims were 3.263M vs. 3.259M (revised up from 3.254M).
Banks Remain Wary of Lending money to buy homes even to those that are insured by the FHA, according to the WSJ.
ISM MFG PMI was 51.7 vs. 51.0 expected and 51.5 previously. Employment was 52.1 vs. 54.7 while new orders were 54.2 vs. 52.3.
Consumer Confidence was 72.2 vs. 73.0 expected and 68.4 previously (revised down from 70.3).
The EPA waived RFG fuel requirements in 10 states and Washington DC due to supply tightness.
Natural Gas Inventories were +65 bcf vs. +67 bcf expected. Inventories are 259 bcf (7.10%) above the five-year average vs. 251 bcf (6.99%) previously. Total inventories are now 3.908 tcf, which is a new record high. The EIA forecasted in its Oct 10th Short-Term Outlook that inventories would end the season at 3.903 tcf. Our forecast made on Aug 24th is 3.984 tcf. There are three more weeks (give or take) left to the injection season.
Upcoming Energy Events
Fri - Non-farm Payrolls
Fri - Monthly EIA Natural Gas Report (12:00pm EST) Tue - U.S. Election
Tue - API Inventories (4:30pm EST)
Wed - Spain publishes assessment of budget measures
Wed - EIA Weekly Oil Inventories (10:30am EST) Thu - Natural Gas Inventories (10:30am EST)
Nov 12th - Eurozone Finance Ministers Meeting
EIA Inventory Review
The EIA’s report on oil inventories didn’t budge the market much in yesterday’s trade initially, but the trade did begin advancing shortly thereafter. The drop of 2.1 MB in crude stocks compared to consensus for an increase of 1.8 MB. Imports fell on the week and offered the largest contribution to the decline. The drop was countered by supply growth, with domestic production increasing 59 kb/d. Product supplied fell 810 kb/d which was a surprise and the opposite of what took place in front of Hurricane Isaac earlier in the season. Overall, the data were slightly positive because of the drop in oil stocks and the narrowing between oil stocks and their five-year average. The drop in demand is worrisome, but perhaps may be taken with a grain of salt given the survey’s position in front of Hurricane Sandy.
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WTI Crude OIL
Brent Crude Oil