The Energy Space



 | Nov 07, 2012 | 11:23 AM EST
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Energy Price Outlook

The market's whipsawing continued yesterday as a strong rally took place. Our bias had expected a rally late last week and into this week, but we were stopped out of a long recommendation in Brent during Friday's $2.49/bbl selloff. Going forward, the market would appear as though it can continue to rally, however, there remains the uncertainty regarding the U.S. and Chinese leadership decisions. We believe that oil may perform better in the long-run if Romney were to win, but near-term trade could benefit regardless of who wins if some uncertainty is removed. Seasonal tendencies suggest as much as we detailed in yesterday's report. Outside of the election, today's trade will get support from tightening supply/ demand balances shown in yesterday's monthly EIA report, Brent's hold at $105/bbl psychological support on Monday, and the potential that fund liquidation through end-Oct may cease and possibly reverse. Pressure will be offered by the partial closure of BP's Whiting refinery for planned maintenance, the backup of Canadian syncrude, elevated inventories, and ongoing oil production growth. On balance, we look for a slightly higher trade today unless the result of the election is still unknown.

WTI settled $3.06/bbl higher yesterday while Brent was better by $3.34/bbl. The consensus behind the sharp rally seemed to be that Pres Obama would be reelected. The rally was made despite weaker JOLTS jobs data and German factory orders, however, the reasoning was that uncertainty would be removed by the election and QE would remain in place. Intrade showed the president gaining in its electronic market. We're not sure about that logic though, as high-yield and other dividend instruments did well yesterday, even though at least some owners of them would get hit with higher dividend taxes next year and would likely liquidate holdings. Additionally, Brent is currently around $2.50 below its end-2011 price while WTI is around $12.00 below, so the reasoning that slow growth and QE is good for energies just doesn't seem plausible.

Today's trade will look to the election results for guidance as well as the weekly inventory numbers. Pressure cold potentially come if states like Ohio are too close to call and provisional ballots need to be counted. Yesterday's API data was uneventful except for potential pressure on gasoline. The API showed a build of 1.4 MB which compares to a consensus for today's EIA of a draw of 1.5 MB. While support for crude oil may continue to be offered by Monday's hold of $85 and $105 in WTI and Brent, both markets face resistance today from either the top of a falling channel pattern or their 50-day moving average. Finally, uncertainty in Europe is worth watching, and has led to a stronger dollar recently. A parliamentary vote takes place in Greece today on the austerity reforms, while the same parliament will vote on an austerity budget on Sunday. On Monday, the Eurozone Finance ministers will meet to decide whether to give €31.5B in aid to Greece.

Natural Gas

December futures settled 6.3 cents higher yesterday in what was a fairly flat futures curve. The market traded higher after prices held above the 50-day MA on both Monday and Tuesday. Focus also was on the nor'easter that's forecast to reach the Northeast on Wednesday and Thursday and bring cold temperatures. Power blackouts from Sandy are now below 1M after reaching around 8.5M at its peak.

Yesterday's EIA monthly report was mixed, as it raised its price outlook for 2012 by six cents and for 2013 by 14 cents. It reduced both its supply and demand growth outlook but supplies suffered more and caused the 2012 supply/demand surplus to fall to 0.57 bcf/day from 0.70 bcf/day previously. The 2013 surplus actually expanded slightly to 0.80 bcf/day from 0.74 bcf/day previously. On the bearish side, it said that electrical-generation consumption of gas may fall to a 27.2% share next year from 30.6% this year due to high prices.

We look for prices to advance slightly over the next day or two, but aren't too excited about the market's prospects overall. Open interest isn't showing any sign of recovery or bargain-hunting. Resistance will be offered at $3.63 and $3.73.

Global Economic & Dollar News

» German Factory Orders were -3.3% m/m in Sep vs. -0.4% expected. It was the biggest decline in a year.

» U.S. JOLTS survey of job openings showed a decline in September of 100K to 3.561M vs. 3.661M previously.

Energy News

» Brent North Sea Crude Exports in December are planned at seven cargoes of 600,000 bbls each. The loading is one higher than in November.

» The BFOE Loading Program will increase 11% m/m (91,624 b/d) in December to 911,290 b/d vs. 819,667 in November.

» Phillip's 66 Bayway Refinery will restart in 2-3 weeks, after equipment was damaged by Hurricane Sandy.

» S&P GSCI will change its crude oil weightings in 2013 by lowering the weight of WTI and raising that of Brent. Brent's index weighting will increase to 22.34% from 18.35% while WTI falls to 24.71% from 30.96%.

Upcoming Energy Events

Wed - EU Updates Growth Forecasts

Wed - Spain publishes assessment of budget measures

Wed - Greece Parliament Vote on Austerity Reforms

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

Thu - China National Congress Picks new Leadership

Thu - ECB Meeting (no change expected)

Thu - Natural Gas Inventories (10:30am EST)

Sun - Greece Parliament Vote on Austerity Budget

Mon - Eurozone Finance Ministers Meeting

Tue - IEA Monthly Report

Tue - API Inventories (4:30pm EST)

Dec 12th - OPEC Meeting


EIA Short Term Outlook

The EIA's monthly outlook yesterday was fairly mixed for both the oil and natural gas markets. The supply/demand balances tightened in crude oil for both 2012 and 2013 even though the EIA's total demand estimate was cut in both years. Supplies are predicted to fall faster than demand and explain the tightening. Despite the tighter balances, the EIA reduced its price forecasts for both WTI and Brent. In natural gas, the supply/demand balance tightened for 2012, but loosened for 2013. The natural gas price forecast was raised for both years. Overall, the report appears as though it can weigh on prices in the near-term due to the price forecast reduction, but movements should be relatively small.

The 2012 estimate of global demand was reduced by 40 kb/d to 89.05 mb/d. Supplies were reduced by 80 kb/d, which left the supply/demand balance at a surplus of 40 kb/d vs. a surplus of 80 kb/d in the previous report. Data for 2013 was similar, with a cut to demand of 70 kb/d and a reduction in supply of 530 kb/d. The supply/demand balance tightened to a surplus of 130 kb/d from 590 kb/d previously. The factors behind the large cut in supply included the partial loss of Iranian output due to sanctions and the reduction in supplies from Nigeria after flooding and pipeline sabotage in October.

The oil price forecast was downgraded for Q4 to an average in WTI of $89/bbl from $93/bbl. Brent was reduced to $110/bbl from $111/bbl. Gasoline prices were cut slightly to a Q4 average of $3.56/gal from $3.60 previously. The report warned of potential price strength due to the outages caused by Hurricane Sandy and low stocks of gasoline and distillates. It left its 2013 average gasoline forecast unchanged at $3.44/gal.

In natural gas, the EIA raised its price forecast to $2.77/mmbtu from $2.71 previously, while its 2013 forecast was raised to $3.49/mmbtu from $3.35 previously. The report showed reduced a supply/demand surplus in 2012, falling to 0.57 bcf/day from 0.70 bcf/day previously. Changes to its estimates of inventory withdrawals was the major factor there. The 2013 surplus actually expanded slightly to 0.80 bcf/day from 0.74 bcf/day previously. What may be bullish though is its forecast for supply growth in 2013, which is now flat from 2012 levels at 68.84 bcf/day (chart 2). By the same token though, total demand in 2013 is forecast to be -0.67% compared to -0.23% in the previous report.

Electrical generation is forecast to be 30.6% generated by natural gas and 37.2% by coal in 2012. The EIA said that prices for natural gas used in electrical generation would average 22% higher in 2013 than in 2012 while coal would be just 1% higher. The higher price of gas will contribute to a decline in the share of total generation fueled by gas to 27.2% next year and a 40.1% share in coal. The EIA didn't provide a full-year forecast last month for comparison.

EIA Inventory Preview

The EIA is anticipated to report a drop in oil inventories of 2.0 MB this week, which would be more than the five-year average decline of 0.7 MB. The numbers will be heavily impacted by Hurricane Sandy, which could create a drop in inventories by reducing imports. Northeast ports were closed for the majority of the survey week, so a large portion of the 900 kb/d in average PADD 1 imports could be lost. New York Harbor opened on Thursday at noon, but there was no power to offload tankers. Lost imports may be partially made up for by a return of the Keystone Pipeline in PADD 2. Other factors are additive, including anticipated weak demand from refineries in the Northeast and higher domestic oil production levels. There were seven refineries affected by the storm, with about 907 kb/d falling to reduced rates and 382 kb/d completely shut. Most facilities were restored to normal levels by Wednesday, however, 308 kb/d in capacity from Phillips 66 and Hess were still offline on Friday as steady power wasn't available. Domestic oil production is potentially additive as well, since output rates remain the highest in nearly 18-years.

Product stocks may have a slightly negative reaction to the storm, but the number will depend on the balance between production and consumption on the week. Cars in New York and New Jersey lined up for miles to get gasoline, however oil refineries reopened at around the same time that gasoline stations did. They were also shut for about the same amount of time, which implies that on balance, the effect may be minimal as the market was essentially frozen. Total product demand typically falls during the week of a storm, so we would look for another drop this week. We anticipate a 1.0 MB drop in gasoline stocks and a 1.0 MB decline in distillates.

Natural gas inventories are expected to add 21 bcf this week, which would compare to the five-year average increase of 36 bcf. NOAA's HDD numbers are around 104-112 and are about 35 degree days higher than last week. A comparison to last year shows a similar 35 degree day jump but with colder temperatures, and resulted in a build of 37bcf. We don't anticipate the number being too bearish for prices regardless of the actual result, because there are only three weeks left to the injection season and inventories are likely to make only a moderate new record peak.

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

Grains Commentary

Published Tuesday morning, 11/6/12

Election Day is finally here and I think it's a safe bet that the entire country is glad, that if nothing else, all the ads that are posted everywhere on what each candidate does wrong will be removed. The grain markets are moving back higher right now with ideas that China is discussing stock piling metals again which has many thinking that grains will be next. The beans are +10-12, meal has gained back $250-3, oil is up 25 points, corn is up 3-4 and wheat is up 6-8.

The Matif wheat contract has traded another all-time high overnight as wheat premiums across the globe are on the rise, also yesterday's condition figures showed the winter wheat at 39% G/E which is the lowest level ever for this time of year. The corn harvest is 95% completed and the beans are 93% completed.

The weather is SA continues to show improvement for crop development with rains still forecasted in the northern parts of Brazil and less rain into the south and Argentina.

The outside markets are subdued as the US deals with the elections. The equity market is marginally higher, crude oil is up .44, RBOB is up 3.40, cotton is up .39, gold is up $7, sugar is up .23, the DCE is higher in all the soy markets and down slightly in corn, and the MDEX finished higher.

The OI in corn fell by 5128, wheat was up 255, beans fell by 5292, meal was down 543 and oil once again spiked higher by another 7901 which brings it to an increase of over 22k in just the past 2 days.

The option markets continue to waffle around as the markets still are seeking some type of new influential news. The likelihood is that premiums will start to creep higher as we head towards Friday and the USDA report. The inverse in the future spreads for both beans and corn seem to show that the nearby will be the more active mover than the deferred for the time being but yet CZ13 premiums are higher than the CH, this seems to create not only some better gamma but possibly being short Vega. The bean structures are not as attractive as corn but none the less we have seen that big inverses either go much higher or collapse, either way it seems that SH should be the one that moves, look to own SH puts vs. SX puts to protect futures spreads. The SM remains the highest in the soy complex and given the global market for meal its most likely justified. The BO has had a big short position in the futures recently and being short vs. meal seems very popular, some of the calls or call spreads are very low cost protection vs. these trades. The wheat at 25% seems low but until something happens owning it can be expensive as one waits for something to happen, WF call spreads seem like value for those who believe wheat is a powder keg waiting to blow.

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