Energy Price Outlook
WTI finally broke out from its tired sideways direction yesterday and posted strong gains, although Brent still appears mired in its three-month consolidation. The higher trend in WTI could continue in the near-term, with support offered by improving economic data, bullish flows in the commitment of traders data, weakness in the dollar, accommodative Fed policy, and production declines in Saudi Arabia. Potential drags to the uptrend will come from questions regarding the possible forward pull of springtime economic activity into the warm winter, delayed effects of Hurricane Sandy, and the upcoming debates over the debt ceiling, sequestration, and continuing resolution. We still like WTI over Brent and favor holding the June WTI-Brent trade entered on Jan 4th at -$14.25 with a target at -$8.00 and a stop at -$14.00. We would also anticipate a shrinking of the WTI futures contango and a narrowing of Brent's backwardation.
WTI finished $1.25 higher yesterday while Brent advanced $1.42. Prices traded gradually higher throughout the overnight hours after Spain witnessed another successful auction and after dovish comments were made by a Fed member. Spain's €4.5B auction of debt spanned in maturity from 2 years all the way to 28 years and witnessed strong demand. On Tuesday, Fitch suggested that the country may not need to have the OMT buy its bonds at all this year, as confidence has been restored to some degree. Apparently the knowledge that the OMT is available to buy Spain's debt is helping to keep rates low. Support also came from the suggestion by Fed Pres Kocherlakota that monetary policy is currently not accommodative enough. That ran counter to growing speculation that the Fed would halt its buying program before its 2015 target.
The rally didn't stop despite a weaker-than-expected Philadelphia Fed index, likely because the stock market kept advancing. There seems to be a sense in both markets that the impact from Hurricane Sandy has already been discounted, as the Philadelphia Fed would have been one sign of that impact. Perhaps Wednesday's passage of the $51B Sandy relief package helped to cushion the impact. Stocks continued to move to the highest levels in five-years as the day progressed, with support from improved housing starts and initial jobless claims outweighing the Philadelphia Fed. Although global demand for oil has weakened somewhat and production is due to outpace demand in 2014, the oil market feels like it wants to trade higher. The commitment of traders data shows this too, as non-commercials have added 48,439 contracts to their net long since bottoming four weeks ago (chart below). Managed money accounts have shown a similar condition, with their net long increasing 77,652 contracts in the same four week period.
Yesterday's trade began the day on the downside by 2-6 cents but recovered after the inventory number and settled 5.9 cents higher. Inventories fell 148 bcf on the week, which exceeded the estimates provided by all analysts in the Bloomberg survey. Inventories are 326 bcf above the five-year average compared to 320 bcf above it last week. The market ended near the high of the day and failed to create any technical signal that bearish activity is in store. The Dec 21st high at $3.532 was held on a closing basis and there is still resistance from the 50-day MA at $3.55 to contend with, however, a close at the day's low rather than at the day's high would have been a clearer signal that there is potential downside in store. A positive bias is in order at least until the $3.55 level, until the potential for bearish action presents itself again.
Yesterday's strong close will combine with the Climate Prediction Center's long-range update and signs of improving demand to offer support in the near-term, while technical factors will remain in the negative column. The CPC's outlook showed temps in the month of February holding below-normal in the northern Plains and Great Lakes states (right). Its Feb-Mar-Apr forecast also brought in an area of below-normal temps in the northwest and shrunk the area of above-normal temps in the southeast (below). Potential demand increases could come from possible diversion of LNG cargoes, where Chinese coal consumption is strong due to cold weather and increased economic activity. There have been several reports recently regarding growing pollution levels in China, which is a signal that economic demand for raw materials is increasing. PMI data from the country have been improving since bottoming in August.
The bearish case will focus on technicals, where the 50-day MA offers resistance at $3.55. That's backed up by the 50% retracement of the Nov 23rd-Jan 2nd downtrend at $3.56, and the Dec 21st high at $3.53. These could combine with a lack of growth in open interest during the past week's rally as well as few signs of short position liquidation by non-commercials and managed money accounts.
Global Economic & Dollar News
» Spain successfully auctioned €4.5B in 2-, 5-, and 28-year debt yesterday.
» Fed Pres Kocherlakota said that "monetary policy is currently not accommodative enough. Historical evidence suggests that as long as unemployment remains above 5.5%, the medium-term inflation outlook will stay close to 2.0%.
» U.S. Housing Starts were +12.1% to 954K vs. 890K expected and 851K previously (revised down from 861K). Building permits were +0.3% to 903K vs. 905K expected.
» Initial Jobless Claims were 335K vs. 369K expected and 372K previously. They reached a five-year low. A Labor Dept analyst said that seasonal factors may have played a role in the decline. Continuing claims were 3.214M vs. 3.127M previously (revised up from 3.109M).
» Philadelphia Fed Index was -5.8 vs. +5.6 expected and +4.6 previously.
» The Algerian Gov't attacked a convoy carrying 15 terrorists and their 42 hostages yesterday. All 15 terrorists and 35 of the hostages were killed, while only 7 hostages survived.
» Enbridge's Spearhead Pipeline was shut on Wednesday for about 11 hours for maintenance. The line was pumping around 183,000 b/d. The pipeline carries crude oil from Cushing to Flanagan Illinois.
» Natural Gas Inventories were -148 bcf vs. -136 bcf expected. The decline put inventories at 316 bcf above the five-year average vs. 320 above last week, but still expanded on a percentage basis, where they were 11.08% above compared to 10.68% above last week.
Sun - German Local Election
Tue - Israeli Election
Tue - Last Trade CLG3
Wed - API Inventories (4:30pm EST)
Thu - Natural Gas Inventories (10:30am EST)
Thu - EIA Weekly Oil Inventories (11:00am 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
May 31st - OPEC Meeting