Energy Price Outlook
Oil prices are a tough call this week. The market received positive news on Friday through better-than-expected jobs data, but prices fell to five-day lows in WTI because the dollar advanced and stocks dropped. We had looked for the oil market to advance in the near-term based on better claims and ADP employment data, a reversal of hedge funds’ selling after the end of some fiscal years on Oct 31st, the restart of Northeast refineries, and technical factors. However, Friday’s liquidation made it difficult to determine what actually was moving the trade. Some pressure may have come from the expectation that oil inventories begin to grow. This is in part due to Sandy but also due to the closure of part of BP’s Whiting refinery, which has caused Canadian syncrude to fall to more than $3.00/bbl below WTI prices. Pressure may also continue to come from elevated levels of oil stocks and oil production shown in the weekly EIA stats. We were stopped out of our long recommendation in Brent during Friday’s selloff.
The jobs numbers on Friday were generally perceived to be better-than-expected, and their report initially created strength in the electronic trading of stock and energy futures. However, both markets turned to the downside shortly after their NY sessions opened with little reason except potential digestion of the employment situation. The selloff continued as the day progressed, with pressure mainly offered by a stronger dollar. Some commentaries suggested that the payroll number would help Pres Obama win reelection on Tuesday. Such an outcome would suggest more slow growth and QE in our view, which could explain the weakness in risk markets like energies. Stock markets may also be impacted by selling ahead of likely tax hikes on capital gains and dividends, which could also translate into weakness in energies. That logic may explain the weakness in energies and equities, but doesn’t clarify Friday's strength in the dollar. In the end, the beat in jobs may have been bullish initially for markets, but the interpretation may have turned sour.
Our view is that some uncertainty will be lifted on Tuesday. That may allow energies to potentially rally, although any recovery may be smaller if the president is reelected. QE3 hasn’t been good for energy prices so far, and Friday’s 171K gain is still far short of the 250K that’s typical during early stages of a recovery. While Tuesday will provide clarity in the U.S., Thursday may provide the same for China, where the Chinese National Congress will meet to make new leadership decisions. There are some expectations that new stimulus and/or monetary easing will take place, but that’s not entirely clear yet. The fallout from Hurricane Sandy appears to be getting more negative, as oil is stockpiling on the east coast due to 308 kb/d in capacity remaining offline at Phillips 66 and Hess, which still cannot obtain steady power supplies. Oil is backing up in the Keystone pipeline in the Midwest as well due to replacement of the largest CDU at BP’s 420,000 b/d Whiting refinery.
Natural Gas
December futures finished 14.5 cents lower on Friday as the focus was on above-normal temperatures forecast in the 8-14 day NOAA outlook. NOAA’s outlooks have had the above-normal temps in them for most of the week, but it gained more attention on Friday during the noon update, which showed warm temps combined with tamer storm activity expected mid-week. That forced December futures below key support from the July 31st high at $3.631, which then brought follow- through selling. The east coast will keep eyes on a system in the Atlantic, which does not appear to be as strong as previously imagined, and may also have added pressure.
The power situation in the east is slowly being fixed, as 4.8 mln are without power now, compared to 4.7 mln on Thursday and 8.1 mln at its peak. Power hasn’t been as bullish for gas recently as it was in the spring and summer months. The EIA’s monthly report on Friday showed that gas consumption by utilities was up 64.5% y-t-d in August. That compared to 88.8% in the 11-year average and thus implied that coal-to-gas switching diminished in July and August (chart below).
Global Economic & Dollar News
- Non-Farm Payrolls were +171K vs. +125K expected. Revisions added +50K for Oct and +34K for Sep, or 94K total. The unemployment rate was 7.9% which was as-expected. The labor force increased 578K while employment increased 410K. The labor force participation rate was 63.8% vs. 63.6% previously.
- Fed President Rosengren said that the FOMC should continue QE until the unemployment rate reaches 7.25%.
Energy News
The Jones Act was waived temporarily by the U.S. gov’t on Friday with the intention of making it easier to deliver oil products to the Northeast. The ports are still lacking power, however, which may make the lifting more symbolic than realistic.
Upcoming Energy Events
Mon - ISM Non-MFG PMI Tue - U.S. Election
Tue - API Inventories (4:30pm EST) Wed - EU Updates Growth Forecasts
Wed - Spain publishes assessment of budget measures
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - China National Congress Picks new Leadership
Thu - Natural Gas Inventories (10:30am EST) Nov 11th - Greece Vote on Reform and Austerity Nov 12th - Eurozone Finance Ministers Meeting
Analysis
EIA Inventory Preview
The EIA is anticipated to report a drop in oil inventories of 2.0 MB this week, which would be more than the five-year average decline of 0.7 MB. The numbers will be heavily impacted by Hurricane Sandy, which could create a drop in inventories by reducing imports. Northeast ports were closed for the majority of the survey week, so a large portion of the 900 kb/d in average PADD 1 imports could be lost. New York Harbor opened on Thursday at noon, but there was no power to offload tankers. Lost imports may be partially made up for by a return of the Keystone Pipeline in PADD 2. Other factors are additive, including anticipated weak demand from refineries in the Northeast and higher domestic oil production levels. There were seven refineries affected by the storm, with about 907 kb/d falling to reduced rates and 382 kb/d completely shut. Most facilities were restored to normal levels by Wednesday, however, 308 kb/d in capacity from Phillips 66 and Hess were still offline on Friday as steady power wasn’t available. Domestic oil production is potentially additive as well, since output rates remain the highest in nearly 18-years.
Product stocks may have a slightly negative reaction to the storm, but the number will depend on the balance between production and consumption on the week. Cars in New York and New Jersey lined up for miles to get gasoline, however oil refineries reopened at around the same time that gasoline stations did. They were also shut for about the same amount of time, which implies that on balance, the effect may be minimal as the market was essentially frozen. Total product demand typically falls during the week of a storm, so we would look for another drop this week. We anticipate a 1.0 MB drop in gasoline stocks and a 1.0 MB decline in distillates.
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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