Energy Price Outlook
The oil market finally “broke out” from its week-long consolidation range yesterday, but the breakout was anything but impressive. WTI settled in the middle of the day’s trading range while Brent ended near the day’s low. While those settlements provide little in the way of positive forward guidance, other signs are more bullish. Support will be offered from the growing appearance that economic data in Asia and Europe are improving, fresh five-year highs in the S&P 500 yesterday, and weakness in the dollar. Pressure will be offered by the potential that Jan 20th local elections in Germany hurt Chancellor Merkel’s coalition, weakness in U.S. oil demand, and Tuesday's monthly EIA report which showed 2014 supply growth outpacing demand 1.7 mb/d to 1.35 mb/d. The ramp-up of the higher capacity Seaway pipeline should narrow the spread between Brent & WTI and a fresh update regarding the startup of the line’s higher levels is expected any day. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00.
WTI finished +0.72/bbl yesterday while Brent settled +$0.13/bbl. Most of the strength in both markets was witnessed early in the session before they gradually weakened in the afternoon. A sense of enthusiasm existed early in the session after Chinese trade data showed gains in imports of refined oil products and iron ore. Oil imports were down only 2.0% m/m but maintained the general uptrend that’s been in place since its economy hit its weakest point last summer (chart). The expectation that central banks in China and Japan will soon be adding more stimulus was also positive yesterday.
Oil markets were also supported by enthusiasm in Europe, where Spain witnessed strong demand for €5.0B in debt offered in its first auction of the year. The 10-year yield fell below 5.0% for the first time since March ’12 (chart). The ECB followed with an unchanged verdict in its policy meeting, and instead of having dissents in favor of a rate cut, the vote was unanimous to leave rates unchanged. ECB Pres Draghi spoke afterward and said that stabilization and confidence are returning to financial markets and that he’s pleased that tail risks have been removed. He said that a normal situation is returning from a financial viewpoint, but there are no grounds for exuberance yet. The euro acted exuberantly and gained more than 2.00 points against the dollar on the sense that the worst of the European debt situation is now behind us. The U.S. followed the European lead and reported continuing jobless claims data that fell to a 4 ½ year low. These data points helped push the S&P 500 to a new five-year high and the Dow to a three-month high. Fundamental support came from reductions in production by Saudi Arabia and Syncrude Canada.
Downside risks appear to be getting put aside in this environment of semi-euphoria, and while they can be ignored for some time, they may continue to build. Wednesday’s inventory report from the EIA showed that total U.S. demand for oil nearly matched the weakest level in at least two years. The first report of this new year has allowed us to observe the five- year average of demand fall in each of the last six years. Future increases may thus appear impressive, but against what base of comparison? Tuesday's monthly EIA report showed a first estimate of 2014 demand growth of 1.35 mb/d. While that’s stronger than 2012 and 2013 demand growth, it was outpaced by supply growth of 1.7 mb/d. As a result, increases in demand are more than being met by higher oil production and will allow inventories and OPEC spare capacity to grow. Another potential negative is the Jan 20th local elections in Germany. Chancellor Merkel remains popular and is not expected to have any issues, however, her Free Democrats coalition partner is seeing falling support and could thus take the wind from the sails of European reform.
Futures settled 8.0 cents higher after a strong rally took place that was tied to the weekly inventory report. The EIA showed a draw of 201 bcf, which compared to expectations of around 186 bcf. The reported draw was near the extreme end of analyst expectations, and may thus have been taken lightly by the market. Despite what appeared to be a very bullish number, prices failed to move above Wednesday's high by 1.6 cents. The number was also somewhat of a surprise because the degree day count was 238 vs. 212 during last week's 135 bcf withdrawal. Similar degree day counts from 2011 yielded inventory draws of 209-233 at the time, which was without the benefit of the increased shale production that has been boosting stocks in the past year.
Prices may rally for a day or two, however, the trend still appears to be to the downside. The market appears likely to continue lower until there's significant and lingering cold weather in the forecast. NOAA's latest map yesterday afternoon showed a shrinking pool of below-normal temperatures in its 8-14 day outlooks.
A longer-term negative could also come from the potential that forthcoming fracking regulations do little to inhibit future drilling. An LA Times blog on Wednesday evening discussed the state’s nominee for conservation chief receiving pushback from lawmakers because of loopholes in new regulations that force drilling companies to disclose the chemicals used in drilling. The nominee said that regulators were trying to strike a balance between public transparency and the state's trade-secrets law, which he noted protects the recipes of products like Coca-Cola. He said that the Gov Brown administration was moving forward with proposed rules that would make the state a leader in environmental protection and public health. This could become a longer-term negative for natural gas in our view, as government bodies that are at the forefront of regulation usually tend to become templates when national legislators come calling. That may imply that the anti-fracking lobby may still not achieve the disclosure they seek, and that fracking may be allowed to continue unabated.
Global Economic & Dollar News
- Spain witnessed strong demand for three instruments auctioned yesterday in its first sale of the year. The 10-year yield fell below 5.0% for the first time since March. Demand was €5.82B for €5.0B offered.
- The ECB left rates unchanged at its policy meeting. ECB’s Draghi said that stabilization and confidence are returning to financial markets and that he’s pleased that tail risks have been removed. Said that a normal situation is returning from a financial viewpoint, but there’s no grounds for exuberance yet. He added that Europe may see a positive contagion from the economic improvement in the same way that negative contagion was an issue previously.
- Initial Jobless Claims were 371K vs. 365K expected and 367K previously (revised down from 372K). Continuing claims were 3.109M vs. 3.236M previously (revised down from 3.245M) and reached a 4 1/2 year low.
- JOLTS Job Openings were 3.676M vs. 3.665M previously.
- Chinese Oil Imports were -2.0% m/m and +8.0% y/y to 5.60 mb/d in Dec vs. 5.71 mb/d in Nov. Refined products imports increased 15.0% m/m and 3.0% y/y to 983,639 b/d in Dec from 855,167 b/d in Nov. Other import data were mixed, with iron ore gaining 7.8%, copper falling 6.6%, and aluminum falling 8.8%.
- Iraq Resumed Crude Exports to the Turkish port of Ceyhan after a fault in the pipeline. The line was shipping 425,000 b/d prior to the shutdown.
- Saudi Arabia cut its oil output 5% to a 19-month low of 9.025 mb/d in Dec.
- Syncrude Canada cut its Jan production forecast by 600,000 bbls to 10.0 mln from 10.6 mln previously. No reason was specified for the reduction, however, November production was reduced due to a failure at a crusher near the mine.
- Bakken Oil moving to the east coast is causing receiving capacity to grow to around 900,000 b/d, according to Bloomberg. The Association of American Railroads said that rail transportation capacity from Bakken was forecast to triple in 2012 to 391 kb/d. Marathon Petroleum has estimated the cost to ship oil from North Dakota to the East Coast at $17/bbl, making it still nearly $10/bbl cheaper than Nigerian Bonny Light transported by tanker ship.
- Natural Gas Inventories were -201 bcf vs. -186 bcf expected. Inventories were -61 bcf from year-ago levels, and are only 308 bcf (10.68%) above the five-year average vs. 389 bcf (12.44%) above it last week.
Tue - API Inventories (4:30pm EST) Wed - Iran-IAEA Meeting
Wed - EIA Weekly Oil Inventories (10:30am EST) Thu - Natural Gas Inventories (10:30am EST)
Jan 18th - IEA’s Monthly Report Jan 20th - German Local Election Jan 29-30 - FOMC Meeting
Feb 12th - EIA’s Short-Term Outlook
Feb 24-25 - Italian election Mar 1st - Sequester Begins 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
Brent Crude Oil
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