Energy Price Outlook
The deja vu trade appears likely to remain in tact in the near-term, as recently attained bullish momentum was undercut in yesterday’s trade. The resulting sideways trend will oscillate between moments of euphoria and doubt, which may essentially feel like a repeat of the decisive rallies and selloffs of the last few weeks which were believed to be the beginnings of new breakouts and breakdowns. Recent bullish momentum had been sparked by improved economic data in China and Europe, weakness in the dollar, accommodative Fed policy, and recent oil production declines by Saudi Arabia. Those were undercut yesterday by weak German GDP, a potential downgrade of the U.S. debt rating, and comments from EU’s Juncker who said that the euro is dangerously high. The bottom line between these ups and downs is that the market has almost gone nowhere in Brent and slightly higher in WTI. Expecting that trend to continue may be the best assumption going forward. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00. In the event of a selloff in WTI, we would look for a rebound after a test of the $91.50 level. We would also anticipate a shrinking of the WTI futures contango. APIs were a bit bullish yesterday afternoon.
WTI futures settled 86 cents lower yesterday while Brent finished down $1.58. The Feb Brent futures make their last trade today. At the start of the session yesterday, some support was provided by another gain in China’s Shanghai Composite and a report that China’s power consumption could rise 9%-10% this year compared to 5.5% last year (chart). The sense that China’s economy bottomed last August along with the HSBC PMI level has been a primary driver of the oil price rally recently, as imports from the country have been firm as well. China’s implied demand figures reached 10.50 mb/d in Nov, which was a new record high. The small overnight rally reversed when the euro currency turned lower following Germany’s reported preliminary 2012 GDP figure at just +0.7% compared to 2011’s +3.0% and 2010’s 4.2%. The euro fell despite Fitch reporting that Spain may not activate the OMT at all in 2013. Further pressure was added late in the session by EU’s Juncker who said that the euro exchange rate is dangerously high.
Additionally two-sided were developments from the Fed, which embarked on a grand new QE program only to undercut it in the FOMC minutes by saying that policy could be tightened before its 2015 target. Dovish Fed presidents have recently voiced concern about the effects of the growing Fed balance sheet even though they were in favor of the action a couple months ago. Saudi Arabia has done something similar by reducing output nearly 1.0 mb/d to 19 month lows at 9.025 mb/d. That was interpreted as an attempt to boost prices to maintain social programs in the country, but Saudi Arabia clarified that on Monday to suggest it was just preventing an inventory buildup during a seasonally weak period of demand.
February futures finished 8.2 cents higher yesterday amid strength in the front-end of the curve. The focus again was on colder temperatures that are predicted to make their way across the Midwest and Eastern portions of the country between Jan 20th-24th. Low temperatures in Chicago are forecast to reach 5 degrees during that time. The updated 6-10 day showed a higher probability of cold in the northeastern portion of the country, although the 8-14 day was generally similar. A key question though will be whether this bout of cold weather is a new norm or only a temporary event. Forecasts in several Midwest cities show much warmer temps both before and after the cold spell next week. The market may have to wait for Thursday’s long-term update from the Climate Prediction Center for more clarity. In its last report, it showed temps in January that were above-normal across the eastern two-thirds of the country. The 2-4 day cold spell next week may not be enough to substantially reduce stocks of natural gas unless it were to linger.
Prices have rallied more than 40 cents off the Jan 2nd low at $3.05 in the last two weeks. The rally looks impressive on the chart, but there are still clouds on the horizon for the uptrend. There is strong resistance from Dec 21st high at $3.532 as well as from the 50-day MA at $3.56. The market also hasn’t seen an accompanying increase in open interest or a notable liquidation in the net-short currently held by non-commercials and managed money accounts. Pressure could also come from potential increases in production as signaled by gains in rig counts since the w/e Nov 2nd. Our forecast for inventories this week is a draw of 129 bcf which would compare to the five-year average decline of 144 bcf. Our end-of- season forecast is 2068 bcf and compares to the five-year average of 1714. The bottom line is that even with short bouts of below-normal temperatures, inventories are on tap to end the withdrawal season with above-normal stock levels. We’d look for potential bearish action close to the $3.53 resistance level this week to think about a possible short position.
Global Economic & Dollar News
- China’s Power Consumption may rise 9%-10% this year, which is faster than 2012’s 5.5% growth.
- China’s Gov’t has pulled government automobiles off the road and closed dozens of factories in order to cut down on record-setting pollution levels.
- China’s Gov’t told the PLA to prepare for war in 2013. Japan wasn’t mentioned but is likely the target, as the two countries have territorial disputes over the Diaoyutai islands.
- Germany GDP was -2.0% in Q4. The full-year 2012 preliminary figure was +0.7% vs. +0.8% expected. That also compared to +3.0% in 2011 and +4.2% in 2010.
- Spain may not activate the OMT in 2013, according to Fitch.
- The Debt Ceiling may be raised for four years based on a deal that would get republicans major tax and entitlement changes, according to Roll Call.
- Fitch said that it will launch a review of the U.S. credit rating if the debt ceiling isn’t raised in a timely fashion.
- Empire State MFG Index was -7.78 vs. unchanged expected and vs. -7.30 previously.
- U.S. PPI was -0.2% vs. -0.1% expected. Core PPI was +0.1% vs. +0.2% expected.
- Retail Sales were +0.5% vs. +0.2% expected while sales ex-autos were +0.3% vs. +0.2% expected.
- National Retail Federation said that holiday sales were +3.0% vs. +4.1% expected. It was the lowest gain since 2009.
- EU’s Juncker said that the euro exchange rate is dangerously high.
- Morgan Stanley (MS, quote)reduced its 2013 natural gas price forecast to $3.50/mmbtu from $3.90 due to warm weather.
- The CME (CME, quote) clarified its ULSD heating oil contract to say that the specification will change to Colonial 62-grade with the May 2013 contract.
- Phillips 66 Wood River Refinery (PSX, quote) returned its crude unit to service at its 356 kb/d facility after an electrical fire on Jan 12th.
Wed – Iran-IAEA Meeting
Wed – EIA Weekly Oil Inventories (10:30am EST)
Thu – IEA’s Monthly Report
Thu – CPC Monthly Weather Update
Thu – Natural Gas Inventories (10:30am EST) Sun – German Local Election
Tue – Israeli Election
Tue – Last Trade CLG3
Tue – API Inventories (4:30pm EST) Jan 29-30 – FOMC Meeting
Feb 12th – EIA’s Short-Term Outlook
Feb 24-25 – Italian election Mar 1st – Sequester Begins Mar 14th – Debt Ceiling
May 31st – OPEC Meeting
EIA Inventory Preview
The oil stocks number this week may reflect a more decisive change in direction from recent weeks where oil stocks fell sharply and products witnessed strong increases. Oil stocks typically gain throughout the first five months of the year after liquidations take place in December. If that’s indeed the case again this year, oil stocks could witness a larger increase than that suggested by the five-year average as late-2012 conditions unwind. An 11.1 MB drawdown was reported in the last week of December and reflected refineries’ intentions to convert raw crude into products. A slowdown in utilization coupled with high levels of imports should create an above-average increase this week. Cushing stocks could increase again this week, as the Seaway pipeline was closed for part of the week in front of Friday’s ramp-up. Cushing should level off or begin to fall with next week’s data.
Gasoline inventories have gained 10.0 MB in the last two weeks while distillates increased 11.4 MB. High levels of utilization have been partly to blame and should begin to pull back a bit this week, in our view. Lower levels of production should add pressure to stocks, but demand has been weak as well and may prevent a drawdown. Distillate stocks have benefitted from higher production and weak demand but may receive pressure this week from lower production and continued exports.
Natural gas inventories are expected to be -129 bcf. NOAA’s HDD calculations were between 179 and 199, which compares to the previous week’s 238. Last week’s draw of 201 bcf was at the larger end of the consensus range, and was a bit higher than our model had predicted. There could be a small amount of retrenchment in this week’s figure as a result. Temperatures were above-normal in the northern Great Plains during the survey week and may help to dampen the withdrawal. The east coast saw near-normal temperatures.
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WTI Crude OIL
Brent Crude Oil
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