The Energy Space



 | Jan 17, 2013 | 8:10 AM EST
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Energy Price Outlook

And so the bullish trade returns. The up-down-up-down pattern that has developed over the past week continued yesterday in WTI and cast a positive light on an otherwise neutral-appearing chart. Brent appears similar, but couldn't get much of a rally going yesterday. The market will still receive support from improved economic data in China and Europe, general weakness in the dollar, accommodative Fed policy, and recent production declines in Saudi Arabia. Those declines can also be interpreted as negative at the same time, because they add to OPEC spare capacity. Yesterday's surprise drop in oil inventories were positive but should be only temporary, as inventories tend to gain through the first five months of the year. Negatives are still in place from uncertainty over the U.S. debt ceiling and from Tuesday's report of weak 2012 German GDP. The bottom line between these ups and downs is that the market has almost gone nowhere in Brent and slightly higher in WTI in recent weeks. 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.

Oil prices inversely mimicked trends in the dollar again overnight, and traded on either side of unchanged. There was some support given by OPEC's monthly report, which officially acknowledged the production cut that took place in December. That can also be a negative for prices, as it means that OPEC has additional spare capacity. OPEC left its 2013 demand estimate unchanged. Pressure was given overnight by the World Bank's cut to its 2013 global growth outlook to 2.4% from 3.0% previously. As the NY session progressed, prices finally caught wind in their sails after inventory numbers showed a surprise drawdown in oil stocks. Cushing inventories grew a sharp 1.78 mb/d due to the shutdown of the Seaway pipeline, which at 150 kb/d, would account for 1.05 MB of the increase.

Despite the up-down nature of the market recently, WTI could still trend in an upward direction while Brent stagnates. The restart of the Seaway pipeline last Friday will help to alleviate the glut in the Midwest U.S. and eventually decrease the amount of imports required. Brent's backwardation should ease while WTI's contango should narrow. The economy appears to be mending still, with industrial production reported yesterday at its highest since 2008. The Fed's Beige Book provides a view of the economy that will be discussed at the next FOMC meeting (Jan 29-30) and suggested that growth was "modest or moderate." While that's not a roaring endorsement, the data was affected by the uncertainties tied to the fiscal cliff, which could eventually be reversed. The biggest concern on the economy is whether above-normal winter temperatures are pulling forward demand from the spring and summer months.

Natural Gas

The market settled 2.0 cents lower yesterday in one of the first signs of weakness within this winter chill inspired rally. Discussions turned away from colder weather to some degree, as the cold spell that is expected to make its way across the Midwest and Eastern portions of the country may be confined to the Jan 20th-24th timeframe. A check of 10-day outlooks in Midwest cities show normal temperatures both before and after that period. The NOAA 8-14 day map revealed a shrinking probability in the below-normal area of temperatures in the Great Lakes and Northeastern states. The 6-10 day appears somewhat similar. The market also received some pressure from the report that U.S. weekly power output fell 2.6% y/y according to the Edison Electric Institute.

Today's trade will focus on whether the 2-4 day cold spell will in fact move on, as well as focusing on the Climate Prediction Center's long-term update. In its last report, it showed temps in January that were above-normal across the eastern two-thirds of the country. If that remains the case for February, next week's cold may not be enough to substantially reduce stocks of natural gas. The three-month F-M-A outlook was similar to the January outlook, but with above-normal temps across a wider section of the country. Natural gas prices are approaching key resistance from the 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. 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

» The World Bank cut the global growth outlook to 2.4% for 2013 from 3.0% previously.

» ECB's Nowotny said that the strength in the euro is not a major concern and that he doesn't anticipate any currency wars. The comment ran counter to that may by Mr. Juncker on Tuesday when he said that the euro's exchange rate is dangerously high.

» Republicans are apparently split over whether to use the debt ceiling to extract spending cuts, or to wait for the sequester and continuing resolution. Regardless of strategy, there is a growing expectation that any dollar of increase should be accompanied by a dollar of spending reduction.

» U.S. CPI was unchanged in Dec which was as expected. The y/y rate fell to 1.7% from 1.8%. Core CPI was +0.1% vs. +0.2% expected.

» Industrial Production was +0.3% in Dec which matched expectations and was the highest since mid-2008. It was +1.0% in Nov.

» The NAHB Housing Index was 47 vs. 48 expected and 47 previously.

» The Fed's Beige Book reported that economic growth was "modest or moderate." It said that fiscal cliff uncertainties are hurting the economy and caused hiring plans to be halted.

Energy News

» Terrorists in Algeria attacked an oil platform operated by UK's BP and Norway's Statoil. The terrorists have 41 hostages including seven Americans. The attack was said to be in response to French military actions in Mali.

» OPEC's December Production totaled 30.4 mb/d, which was down 465,000 b/d from Nov. It's monthly report showed that it expects 2013 global oil demand growth to be unchanged at +0.9%.

» IAEA Inspectors negotiated in Iran yesterday for wider access to suspected atomic sites. World powers apparently will have a meeting with Iran on Jan 28th & 20th.

» U.S. Weekly Power Output fell 2.6% y/y according to the Edison Electric Institute.

Upcoming Events

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)

Wed - EIA Weekly Oil Inventories (10:30am EST)

Jan 28-29 - Iran and World Powers hold Nuclear Talks

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


EIA Inventory Review

Oil stocks fell a surprising 1.0 MB in yesterday's report and ran counter to most of the analysts surveyed by Bloomberg. In that survey, only one of the 11 analysts expected a decline. Yesterday's drop in oil stocks was prompted by a fall in imports and a moderate recovery in demand. The fall ran counter to the seasonal tendency, which shows inventories typically increase fairly steadily in the first five months of the year. We don't see why that can't happen again this year and would anticipate that trend to resume fairly soon. Inventories in Cushing Oklahoma grew a sharp 1.78 MB, but the growth was prompted by a temporary shutdown of the Seaway pipeline in the week leading up its ramped-up capacity. Cushing inventories should stabilize and/or fall in next week's report. Overall, the number caught the market off guard and was favorable for prices. The oil market's rally still faces headwinds, which could imply that the impact of yesterday's inventory report could be limited to just a day or two. The data and our analysis follow below.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Oil stocks were -1.0 MB vs. +2.1 MB expected. It appears that inventories failed to build this week due to a lack of a sustained recovery in imports following declines at year-end. Imports fell 312 kb/d on the week to 8.03 mb/d after last week's increase of 1.25 mb/d in the first week of the year. It's possible that last week's build had brought forward some of this week's imports as can be the case from time to time. Imports usually surge in the first three weeks of the year, after refiners pull back on crude oil orders at year-end. Inventories were also pressured by a 199 kb/d increase in demand, which recovered from a sharp 1.14 mb/d decline in the previous week. Oil production added another 39 kb/d to inventories and rose to the highest level since Jan 22nd '93 from the highest since Mar 5th '93. Refinery utilization fell 1.2% to 87.9% which meant that refineries processed 204 kb/d less in crude oil during the week.

Oil stocks are now 37.98 MB above the five-year average compared to 40.58 MB above it last week. Stocks at Cushing set a new record high of 51.86 MB and gained 1.78 MB on the week. The shutdown of the Seaway pipeline played a role, as it ramped up to the upper-200 kb/d level of shipments from 150 kb/d previously. Capacity has been raised to 400 kb/d.

Gasoline stocks were +1.9 MB vs. +2.6 MB expected. Refinery production gained 205 kb/d despite the reduction in the utilization rate. A follow-through from previous gains in utilization was likely the reason for the increase. Gasoline demand recovered by 310 kb/d but still remains below the lower boundary of the five-year range. Gasoline imports fell 72 kb/d. The overall level of inventories are 13.51 MB above the five-year average compared to 14.84 MB above it last week.

Distillate stocks were +1.7 MB vs. +1.5 MB expected. In a stark difference with gasoline, refinery production fell 356 kb/d on the week although production had been much less volatile than the gasoline numbers have been recently. Demand increased 360 kb/d on the week, although weakness seen in the last several weeks has caused the four-week average to appear as though it's racing for the bottom. Distillate stocks are now 17.21 MB below the five-year average vs. 16.83 MB below it last week.

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