Energy Price Outlook
Oil prices may hold within a sideways trading direction this week, as the short-term rally contends with a building bearish divergence on the daily stochastics oscillator. Near-term support may come from weakness in the dollar, yesterday's assurance of accommodative Fed policy from Chairman Bernanke, and from expectations of improving economic data (housing and Philadelphia Fed on Thu). There's a growing potential for pressure, however, from a bearish divergence on the stochastics oscillator, weakness in oil demand, and the prospects for supply growth to outpace that of demand. Saudi Arabia may also add pressure after the country assured oil supplies in a statement yesterday. If the growing divergence can pressure WTI, we'd look for a rebound after a test of the $91.50 level as well as a narrowing of the Brent-WTI spread. We favor holding our June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00.
Oil prices advanced 58c/bbl in WTI yesterday and $1.24/bbl in Brent. WTI seemed to underperform based on the refinery outage at Phillips 66's Wood River plant in Illinois as well as due to the potential for bickering in Washington over the debt ceiling. The Wood River facility is due to be restarted "within a couple of days," according to Phillips, following a power outage on Saturday. A press conference held by Pres Obama yesterday saw him reiterate his intention not to negotiate with Republicans over raising the debt ceiling. He indicated that he wants more revenue and would be okay with raising the ceiling without many spending cuts. He said that obstinate Republicans can't get everything they want, although he sounded obstinate himself. A Politico article implied that Republicans may be more willing to shut down the gov't than expected. The fight that's developing pressured the dollar, which in our view, added at least a short-term boost to energy prices. If the debt ceiling debate continues to falter, it could eventually become a negative for oil prices. But if the dollar continues to weaken, oil may benefit. The dollar also fell yesterday after Apple Computer cut in half its orders for 65 mln iPhone 5 screens.
Until any downside momentum can be achieved, energy markets may remain firm with support offered by the easy monetary policy. Friday's CFTC data showed that large funds are positioning for such a case, with non-commercials adding 16,700 contracts to their net-long and managed money accounts adding 24,691. Fed Chairman Bernanke yesterday appeared to walk back some of the hawkish suggestions in the FOMC minutes published a week ago which said that several members though accommodation could end sooner than previously communicated. Mr. Bernanke said that the recovery remains fragile and that it shouldn't be hampered by fiscal cuts that are too sharp. Earlier in the day, Fed Presidents Evans and Lockhart raised concern about the effects of QE but signaled that it would be three years until it is unwound. There were also dovish comments made in Japan and China as well, which may have supported energy prices. The prospect of easy money needing to find an investment home could be bullish for hard assets like commodities.
Feb futures settled 4.6 cents higher yesterday, as the focus remained on colder temperatures. CWG predicted below-normal temps in the eastern U.S. from Jan 19th-23rd, and last week's NOAA maps showed most of the country engulfed by the color blue. Friday's COT report showed that managed money accounts subtracted 5,060 contracts from their net short, while non-commercials subtracted 7,468 contracts. That may suggest that they were exiting short positions possibly at the end of the week, but it's not large enough to suggest that large funds are exiting their bearish strategies. Managed money has bounced 7,511 contracts in the last two weeks, but fell 110,904 in the month of Dec.
It's difficult to get very bullish beyond the next day or two given technical resistance at $3.53, stable/rising gas rig counts, and an inventory withdrawal Thursday that will likely be smaller than the five-year average. Technical resistance at $3.53 is taken from the top of the 2H December consolidation pattern. Rig counts for natural gas drilling bottomed on Nov 2nd at 424 before stabilizing and now steadily increasing to 434. Horizontal counts fell to around 1,100 in early-Nov and are now 1,119. Lastly, inventories are expected to fall 129 bcf this week and is less than the 144 bcf shown in the five-year average. Next week's inventories could potentially fall around 150 bcf which is less than the five-year average decline of 176 bcf. 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. Our end-of-season forecast is 2068 bcf and compares to the five-year average of 1714. 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
» Japanese PM Abe said that he wants to see the BOJ achieve its 2% inflation goal within the next few years.
» China's Shanghai Composite advanced more than 3% due to speculation that the gov't will expand the amount of capital that foreign institutional investors can put into Chinese markets.
» Fed Pres Evans (dove, voter) said that the current QE program could be wound down if the U.S. economy started creating 200K jobs for several consecutive months. He said that the Fed will likely begin raising rates in 2015.
» House Republicans are toying with the idea of shutting down the gov't, according to Politico. The article suggests that more republicans are signing on to the idea than people realize.
» Fed Pres Lockhart (centrist, non-voter) said that he's concerned about the size of the Fed's balance sheet. The risk is that the Fed's share of treasury markets could have adverse effects on market functioning and stability. Said that QE is open-ended now, and that it may take 3 years to reach 6.5% unemployment.
» Pres Obama said that a debt ceiling failure by Congress could mean a recession. Said that he will not have another debate with this Congress about whether they should pay bills that they've already racked up. Said that the job of deficit reduction can't be done through spending cuts alone.
» Fed's Bernanke said that the U.S. is in a relatively fragile recovery and that it shouldn't be unduly hampered by fiscal cuts that are too sharp. At the same time, he said that there's a need to think about long-term debt sustainability and that the federal budget must be brought under control.
» Saudi Arabia said that its cut in production in December was not designed to push prices higher. December output fell 4.9% to 9.025 mb/d and was the lowest in 19 months. It added that it is committed to a stable market.
» The Brent-WTI Spread will narrow to $6/bbl in Q2, according to Goldman Sachs. It said that gasoline is vulnerable to an upside spike in prices during the summer because of low European refining runs.
» Natural Gas Truck & Bus Sales may reach 930,000 worldwide by 2019, according to Transport Topics. Currently, about 75% of the sales are to the Asia Pacific region despite high prices of natural gas there.
» Covanta and Clean Energy partnered to develop CNG filling stations at Covanta locations.
» Phillips 66 Wood River Refinery shut a crude unit at its 356 kb/d facility due to an electrical fire on Jan 12th. The unit will return to production "within a couple of days."
» Chevron's El Segundo Refinery in southern California experienced a fire which was reported to have damaged equipment.
Tue - API Inventories (4:30pm EST)
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)
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
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.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures
Published Monday morning, 1/14/12
The USDA never ceases to amaze many as once again it appears that the game is back on regarding the concern of old crop corn supplies. The markets are being driven by the spreads once again with CN-CZ gaining over 25 cents from last Friday. The market now needs to assess at what level rationing is implemented.
The CO of 602 will most likely the lowest number that the USDA will issue but saying that it still prevents the market from getting comfortable with supply anytime soon and will prevent any significant break as this would only attract additional demand. The wheat stocks are now shrinking as well and with Russian supplies along with SA concerns the shift of feed to wheat may not be as profitable in years past. The bottom line to grains as this will give the market some volatility for the next 3-5 months and if there are any hiccups in early US weather then 2013 could be the year of grains once again.
The bean CO of 135 is a bit less compelling as SA will be the focal point from here forward on how quickly and efficiently will they be able to export in the coming weeks? We all know that their crops are massive but this may not be fully felt until later in 2013 when they typically die off in the export channels and the US comes back online, this may not be the case this year as they will have product to sell through the balance of 2013.
The weather in SA is good; at this point it's more about harvesting weather than it is growing weather. The US will quickly start to be monitored again and as of now most of the growing region is still well short of what is needed, yes there has been better moisture over the past 6-8 weeks but much more is needed to replenish last year's drought. For example we have been told that in some areas of IL that corn roots went down 6 feet to find moisture last year, if that is repeated this summer the roots will have to go even deeper to find moisture. Don't go buying CZ today based on this but rather something to monitor.
The OI in corn increased by 16378, wheat was down 6870, beans were up 2388, meal was up 113 and oil increased by 2325.
The outside markets are mostly higher but not any significant market influences, the DCE closed higher in the soy and lower in corn while Matif is higher in all markets. The options markets did what they typically do for USDA reports get pumped up going into the report and quickly exhaling when the figures are released. The bean put skew remains very steep which still favors doing 1x2 put spread or looking to sell puts and buy calls with futures adjusted. The old crop corn story is once again alive and well and with this look to sell CH put spreads to buy call spreads, such as selling the CH 7-670 put spread to buy the 750-800 call spread. The deferred corn options remain at a premium with CZ trading at 25%, look to do similar structures of buying call spreads and selling put spreads. The BO remains cheap at 20% and given the fact that the funds are short and the meal story seems to be slowing continue to look for upside opportunities. The wheat cards are pointing that there could be some decent upside potential based on global situations along with the near record fund short, The WH 8-850-9 call butterfly for 6 cents is a low cost upside play.