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*Inventory report schedule during the holidays:
API report will be released at 4:30 pm EST Thursday Dec. 27 and Jan. 3
EIA petroleum report will be released at 11 a.m. EST Friday Dec. 28 and Jan. 4
EIA natural gas report will be released at 10:30 a.m. EST Friday Dec. 28 and Jan. 4
Energy Price Outlook
The sharp drop in energy markets on Friday was a demonstration of the influence that economic issues in Washington can exert on oil prices. Near-term trading direction will thus be influenced one way or the other by what happens with fiscal cliff negotiations over the weekend and between the Christmas and New Year's holidays. We take a look at the effect of the fiscal cliff on energy markets and the comparison to the debt ceiling debate 18 months ago in the Analysis section below. In the background, pressure will be exerted on oil prices by Thursday's bearish spinning top reversal pattern on the candlestick chart, its hold at the $90/bbl resistance level, elevated levels of oil inventories, and by uncertainty over the health of the U.S. economy. The positive side will look to WTI's 50-day MA at $87.50, and from improvement in the Chinese and European economies. Given the quadruple failure near the $90/bbl level in WTI in the last two months, we would anticipate the sideways consolidation continuing in the near-term.
The inability to pass Plan B in the House on Thursday evening roiled markets in their electronic sessions as well as during Friday's daytime session. Comparisons with the failed TARP vote in 2008 were made Thursday night as S&P futures fell 48.90 points at their worst levels. Futures later stabilized around 23 points lower all the way into the U.S. session's open. Oil futures didn't suffer nearly the same fate as stock futures, but they did weaken around 90c/bbl in the hour or two that followed the failed vote. WTI fell $2.17/bbl at its worst level just after the NY session's open. As we discuss in the Analysis section below, the lack of agreement on the fiscal cliff as well as its impact on the economy should offer a negative impact on oil prices similar to what was seen during the July/August 2011debt ceiling debate. A bottom in oil prices wasn't made until two days after S&P downgraded the U.S. debt rating (which was three days after the debt ceiling was averted).
In the background, the market may still be adversely affected by WTI's hold at the $90/bbl resistance level for the fourth time in two months. Open interest has fallen during the past week where the market had generally rallied, which indicates that the rally has been built on short-covering. Pressure could also come from comments made by Saudi Arabia's oil minister al-Naimi who said that even though oil supplies are adequate and additional oil would only go into inventories, his country would still be willing to honor requests from customers for additional oil. Finally, the API reported on Friday that U.S. oil demand dropped to a 17-year low in November.
Natural Gas
January futures closed 1.1 cents lower on Friday amid a sideways and relatively quiet session. The trade really had the feel of winding down for the holidays and seemed more like a continuation from Thursday's strength. Colder weather forecasts on Thursday had created a 14 cent rally which saw some follow-through early in Friday's session. The market later fell back toward slightly lower levels by the close, however, which helped create a bearish spinning top reversal pattern on the candlestick chart (below). As a result, we favor maintaining our long position entered on Wednesday at $3.30, but also favor raising the stop to $3.40 from $3.30. The target is maintained at $3.60.
Global Economic & Dollar News
- German GfK Consumer Confidence was 5.6 in Jan vs. 5.9 expected and 5.8 previously.
- House Republicans would not support Speaker Boehner's plan to raise taxes on incomes over $1M, saying that they were not elected to raise taxes and were worried about primary challenges. Others didn't support it because their were no spending cuts. The motion was pulled off the floor and the House went into recess.
- The White House responded by saying that the preside is determined to make a cliff deal.
- Majority Leader Cantor said that the House would remain in session until a deal was made.
- House Members were sent home for Christmas but have been placed on a 48-hour notice to be able to return to Washington within 48 hours.
- Speaker Boehner admitted that he didn't have the votes to pass Plan B. He said that the House passed bills in May and Sep to deal with taxes, the fiscal cliff, and the sequester. He said that the Senate hasn't sent a bill to the House, but that he would remain open to negotiations with the Senate and President.
- University of Michigan Final Sentiment was 72.9 in Dec vs. 74.5 in the preliminary reading and vs. 82.7 in Nov. Expectations were 75.0.
Energy News
- Saudi Arabia's Al-Naimi said that oil supplies are adequate and that the oil market is functioning well. Any additional supply would help inventories. He added that there are customers who will come to every producer and ask for volume, and that Saudi Arabia will honor the requests of its customers.
- U.S. Fuel Demand dropped to a 17-year low, according to the API.
Upcoming Energy Events
Thu - API Inventories (4:30pm EST)
Fri - Natural Gas Inventories (10:30am EST)
Fri - EIA Weekly Oil Inventories (11:00am EST) Jan 16th - Iran-IAEA Meeting
May 31st - OPEC Meeting
Analysis
Oil Succumbs to Fiscal Cliff
Oil prices fell sharply on Friday after Thursday evening's failed vote in the House to keep tax cuts in place for 99.81% of Americans showed a republican party in disarray and suggested that there was a reduced likelihood of a fiscal cliff deal being struck before the end of the year. A tax hike on $1M+ incomes was thought to be more palatable than one on incomes over $400K or $250K. The election results nearly two months ago have caused this disarray not simply because republicans did not win the presidency, but because Americans voted for a divided government with drastically different ideologies. It's even possible that some of the same voters that wanted to keep their republican Congressman in place also voted to keep their democratic President in place.
The conflicting ideologies behind such an outcome are held by people that don't work well across the aisle, and that is now creating further uncertainty in the economy. The vote by Americans to proceed through uncertain issues such as the fiscal cliff, tax & spending policy, and implementation of new regulations is akin to disarming soldiers going into a battle. What's that saying about "united we stand, divided we fall?"
Stocks fell sharply on the news yesterday as did the oil markets, even though the two sides are close and the choice is a simple one of American solvency. Energy markets are susceptible to such division based on the adverse consequences in the economy caused by higher taxes and reduced spending, as well as by the inability to compromise in Washington.
Such was shown during the debt ceiling debate in July and Aug 2011. The two sides had been going back and forth in early 2011, but pressure began building over the summer due to the approaching deadline of technical default, which was Aug 15th.
Oil prices peaked on July 26th, as shown in the chart below. By then, several key events had already taken place. S&P lowered its outlook on U.S. debt to negative on April 18th, the republican budget died in the Senate on May 25th, a "clean" hike in the debt ceiling died in the House on May 31st, and the Cut, Cap, and Balance Act died in the Senate on July 22nd.
WTI oil prices fell from a peak of $100.62 on July 26th to a low of $75.71 on Aug 9th. During that time, the debt ceiling was resolved, but S&P downgraded the credit rating nonetheless. The timeline showed that the president and Speaker Boehner reached an agreement to raise the debt ceiling and reduce the deficit on July 31st. The House passed the bill on Aug 1st while the Senate passed it on Aug 2nd. The president signed it on Aug 2nd. S&P downgraded the rating after the close on Friday Aug 5th. WTI reacted by falling $5.57 the following Monday and another $5.60 on Tuesday at the day's low before it rebounded and closed only $2.01 lower.
The fear of a government default as well as the inability of democrats and republicans to compromise in 2011 created uncertainty in oil markets and a potential loss of demand. The market recouped about half of its losses in the two weeks that followed, however, all of the losses weren't recouped until mid-November. Similar conditions are underway now, and could keep pressure on oil prices until a resolution is found.
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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