Energy Price Outlook
Oil prices created an inside-day in WTI yesterday and both Brent and WTI again had trouble with their 50-day moving averages. Those technicals may offer pressure again in today’s trade, where the market will also be weighed down by continued growth in U.S. oil production, growth in oil stocks, building gasoline inventories, and generally weak demand. The ongoing lack of progress on the fiscal cliff will also pressure energy prices. The Fed action on Wednesday was positive from a “store-of-value” perspective as investors may gravitate toward hard commodities, however, QE hasn’t benefited the oil market much in recent years as it has for gold. The Fed’s 6.5% unemployment threshold may also create uncertainty as the unemployment rate gradually declines. Motiva’s Port Arthur refinery is expected to restart its crude unit over the weekend. We would stick with the opinion that prices may fall in the near-term, but that's been a tiring recommendation in the last six weeks and thus there's no compelling trade to be had.
WTI made an inside-day yesterday and settled 88 cents lower. Brent finished $1.59 on the downside. Yesterday’s selloff in Brent undid its outperformance of WTI on Wednesday, with weakness triggered by a lack of progress in fiscal cliff negotiations. Statements from House Speaker Boehner caused risk to be reduced when he said that “unfortunately, the White House is so unserious about cutting spending that it appears willing to slow-walk our economy right up to and over the fiscal cliff.” He added that the “risk remains” that all tax rates will rise at year's end. House Minority Leader Pelosi contributed to the anxiety when she said that any talk of deeper spending cuts should await discussions on a tax overhaul next year. The stock market sold off steadily throughout the session on the news and is beginning to focus more on a potential Republican “doomsday scenario” where they pass an extension of the middle class tax cuts and nothing else on unemployment benefit extensions, dividends/cap gains, the debt ceiling, closing loopholes, etc. The inability of Washington to come to an agreement is showing itself once again now just as it did during the debt ceiling negotiations in July and August 2011. It could continue to offer pressure to the market in the near-term.
Natural Gas
The market fell 3.5 cents yesterday as trade approached the weekly inventory numbers. Weakness was applied once again by expectations for above-normal temperatures, where most forecasts are expecting above-normal temps in the central portion of the country. The inventory report was a bit bearish too, as it showed a build of 2 bcf and compared to the consensus of a 3 bcf draw. Prices declined around five-cents on the news but quickly rebounded toward unchanged on the day within a few minutes. Inventories are now 283 bcf above the five-year average compared to 168 bcf above it last week. They’re also now 48 bcf above the top of the five-year range which is the highest since the w/e Nov 9th when inventories were still contracting toward the five-year average.
Inventories are now down only 123 bcf since the first withdrawal five weeks ago. In our comment on Wednesday, we looked at seasons with small withdrawals in the first five weeks to see if they were precursors to smaller drawdowns over the entire season. The answer is that they are not. There was only one other year in the last 10 that had a smaller withdrawal to this point, which was 2006’s -44 bcf. That entire season withdrew 1,950 bcf and was only slightly below the average decline of 2,043 bcf. The smallest full-season drawdown was 2011’s 1,483 bcf and the first five weeks started with 304 bcf in withdrawals.
Traders appear to still be leaning bearish based on the small amount of withdrawals so far, but histor y suggests that may not be appropriate. While production has increased substantially due to shale and may still offer pressure, small withdrawals early in the season are no guarantee that the entire season will not see improvements in demand. Focus now appears to be turning toward support at the 100-day MA at $3.25 on the continuation chart for the next possible chance at an upside reversal. We’d remain neutral on the market until bullish action signals the early stages of an upside reversal.
Global Economic & Dollar News
- China’s Xinhua News said that the country won’t have large-scale economic stimulus plans for next year.
- European Officials struck a deal on bank supervision that would create a rough framework for a single bank supervisor. The ECB will have some control over banks with assets of greater than €30.0B.
- Fiscal Cliff Negotiations appear to be closing the gap on taxes, but there was little additional progress reported. Speaker Boehner offered more revenues than the $800B previously discussed but only if serious entitlement reforms are considered.
- U.S. Retail Sales were +0.3% in Nov vs. +0.5% expected and +0.3% previously. Sales ex-autos were unchanged which was as-expected.
- Initial Claims were 343K vs. 369K expected and vs. 372K previously. Continuing claims were 3.198M vs. 3.221M previously (revised up from 3.205K).
Energy News
- BP’s Whiting Refinery (BP, quote) shut one of its two operating crude units (Pipestill 11C) for unplanned repairs. The unit unsuccessfully attempted a restart last weekend and processes mainly sour crude at a rate of around 100,000 b/d.
- Natural Gas Inventories were +2 bcf vs. -3 bcf expected. Inventories are 283 bcf (8.03%) above the five-year average vs. 168 bcf (4.62%) above it last week.
- Tesoro (TSO,quote) is looking into rail for potential shipping of Bakken and Canadian crude oils to its refinery in San Francisco. An unloading station has been modified to receive 5,000 b/d of Bakken by rail already, and the plant has the capacity to process between 30-50 kb/d.
Upcoming Energy Events
Thu Evening - Chinese Flash HSBC MFG PMI Fri - Last Trade Jan Brent
Tue - API Inventories (4:30pm EST) Wed - Last Trade Jan WTI
Wed - EIA Weekly Oil Inventories (10:30am EST) Thu - Natural Gas Inventories (10:30am EST) May 31st - OPEC Meeting
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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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.
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