Energy Price Outlook
Although small bounces in oil prices are possible at any time given the market's increased volatility, we expect the market to generally trend lower over the next few weeks. WTI could reach $80/bbl while Brent could fall toward $100/bbl. The election results were the largest cause of the selloff yesterday in our opinion and present an ominous view for demand going forward. We had anticipated a recovery in the market going into the election based on increased clarity, and accompanied by upside follow-through on a Romney victory. However, the discourse in Washington and the stagnant growth of the last few years appear likely to continue, which should weigh on demand. Pressure on prices could also come from possible increased regulations, carbon taxes, and higher investments in alternative fuels. Potential upshots for oil would be seen if a deal to avoid the fiscal cliff is struck and/or the president governed from the center. Neither appear to be likely at this point.
WTI settled $4.27/bbl lower yesterday while Brent lost $4.25/bbl. The U.S. election results were the largest cause of the selloff yesterday in our opinion, even though some had suggested that the Greek vote on austerity and comments from ECB's Draghi were to blame. The Greek vote finally began late yesterday afternoon and was expected to be successful. The Draghi comments basically suggested Germany was being affected by peripheral debt issues, which that shouldn't have come as a surprise.
The biggest cause in our view was that the market was leaning toward a Romney victory, and had to unwind long positions. New shorts were added as well, since the view on demand is likely lower due to the prospect of economic policy essentially remaining the same. The Dow Industrials fell 369 points at its low and finished the day down by 313 points. Energy stocks were sharply lower, along with defense and financials. Coal stocks were losers on the likelihood that more regulations will continue to whittle down the number of coal-fired power plants. Defense was lower due to uncertainty about the fiscal cliff and defense spending. Boeing said it would cut jobs and $2B in costs. Financials were lower on fear that the election of Elizabeth Warren and Alan Grayson would be bad for banks and on the likelihood of full Dodd-Frank implementation.
Our view going forward is negative, as the changes we do expect from Washington are anti-growth. Pres Obama ran on raising taxes as his main platform and will likely fight hard to get them. Spending is unlikely to be cut, which makes a fiscal cliff standoff likely later this year. Slow economic growth will keep QE in play, which has seen WTI fall nearly $14/bbl since QE3 was announced on Sep 13th '12. Over the next few months, WTI is likely to maintain the lower end of the range of the last three years of $64-$115. After the bounce in 2009 following the credit crisis, 2010 began in WTI at $79.28/bbl, which is only $5.16 below yesterday's close. Traders may soon be looking at that price once again.
Today's trade will focus on the inventory report, which is expected to show a build of 27 bcf vs. an increase of 36 bcf in the five-year average. Such an increase would normally set the market on a higher path as the build fails to keep up with the five-year average. However, a secondary focus is on weather forecasts which are turning above-normal following the passage of the Nor'easter that's due to reach the Northeast by today. Rain reached the area yesterday afternoon, but the focus today will be on winds and any power outages that result from the storm.
December futures finished 3.9 cents lower yesterday and may fall again today. The warm temps and potential power outages may decrease demand for heat and power generation. It's also difficult to be excited about the market after Tuesday's Short-term Outlook from the EIA, which 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. 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
» The European Commission cut its GDP forecasts for 2012 to -0.4% from -0.3% and for 2013 to +0.1% from +1.0%.
» ECB's Draghi said that inflation risks are "very low" and that the debt crisis is starting to hurt Germany.
» German Industrial Output was -1.8% vs. -0.7% expected.
» Fitch Ratings said that Washington will need to quickly secure agreement on avoiding the fiscal cliff and raising the debt ceiling following the election. Failure to do so in a timely manner as well as securing agreement on deficit reduction would result in a rating downgrade in 2013.
» Twenty One Tankers will arrive in New York Harbor in the next four days. Five will carry gasoline, five naphtha, four crude, and three fuel oil.
Upcoming Energy Events
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
Wed - API Inventories (4:30pm EST)
Thu - EIA Weekly Oil Inventories (11:00am EST)
Nov 20th - Bernanke Speaks
Dec 12th - OPEC Meeting
EIA Inventory Review
An increase of 1.8 MB was reported in crude oil stocks by the EIA yesterday, which compared to consensus of +1.7 MB. The contributing factors mostly saw small changes, and there wasn't much that stood out in crude. The numbers that gained the most attention were in gasoline, where the effects of Hurricane Sandy were played out through declines in imports, production, and demand. Comparisons to five-year averages of oil, gasoline, and distillates, however, all expanded and could add pressure to the markets in the near-term. 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
Crude oil stocks were +1.8 MB vs. +1.7 MB expected. The number was helped by a 399 kb/d reduction in refinery inputs, with 290 kb/d of that in PADD 1. There were seven refineries impacted by the storm, with about 907 kb/d falling to reduced rates for a few days and 308 kb/d in capacity from Phillips 66 and Hess that still remain offline. An increase in Imports of 89 kb/d also helped inventories grow, which was surprising given Sandy. Rather than blocking oil importation in PADD 1, imports to that district actually increased 198 kb/d and witnessed the largest gain of any of the five PADDs. Other factors were mixed, with domestic oil production gaining 8 kb/d and countered by a 45 kb/d increase in demand. Oil production is now the highest since Dec 23rd 1994, or almost 18 years. Oil stocks are now 41.96 MB above their five-year average, and is the highest since 42.08 MB above in the w/e June 22nd.
Gasoline stocks were +2.9 MB vs. -1.5 MB expected. The largest factor in the build was a drop in demand of 537 kb/d. Other factors were negative including a 346 kb/d fall in imports and a 311 decline in refinery output. The number was tough to predict, as it was difficult to determine the balance in demand from gasoline stations that were mostly closed in the Northeast. Inventories are now 0.78 MB below the five-year average compared to 3.88 MB below it last week.
Distillate stocks were +0.1 MB vs. -1.6 MB expected. Inventories were helped by an increase of 55 kb/d in production and a 23 kb/d gain in imports. Demand increased 46 kb/d and was subtractive from stocks. Overall distillate stocks are now 27.29 MB below the five-year average compared to 29.28 MB last week.
Published Wednesday morning, 11/7/12
Now that $6 billion has been spent between Obama and Romney we have determined to keep things the same, with the benefit going towards commodities as we now know that we will keep printing $. The markets last night have seen movement on both sides with grains moving higher and soy slightly lower.
What does the Obama victory mean for the grain markets? On a day to day operation not to much, but if we break it down we have witnessed that this administration will spend tremendous amount of $ on alternative fuels...even if they don't work, they will print more and more $ which keeps commodity prices inflated, and you can bet that there will be more regulations than ever before.
The outside markets don't seem to be overly excited about Obama today as equities are lower, crude oil is down $1.29, natural gas is down .02, sugar is down .06, cotton is up .11, $index is stronger, RBOB is down 2.90, the DCE is lower in all markets, the MDEX is up 25 ringgits and the Matif wheat traded another new contract high, corn is slightly higher while rapeseed is down slightly.
The OI in corn fell by 910, wheat is up 2464, beans are down 6141, meal is down 1321 and oil once again increased by 2403.
The basis levels are showing a different story than what flat price is doing, the corn and the bean basis has done nothing but move higher over the past 7 days, the Gulf is trading +92 for beans...that puts it near $16, the corn basis is +74. The bean receipts are being cancelled and loaded out which the driver of the SX-SF is going from a carry to an inverse. The bottom line is that the cash markets are telling is things are tight and demand is good; expect to see both corn and wheat exports out of the US start to pick up soon.
The USDA will release its monthly S&D figures on Friday; it is expected to see an increase in the bean yield pushing near 38.5, while the corn yield is estimated to be unchanged. Even with the increase in bean yield the CO is expected to be unchanged which indicates that demand is robust.
The option markets have not shown any concern for Fridays report as of yet as premiums continue to waffle around near the same levels from earlier in the week. The wheat markets seem to be showing signs of a pulse again as world markets are moving higher, but with Matif volatility still trading at a discount to CME levels it seems more advantageous to buy their markets since they are already trading contract highs. The downside bean puts remain discounted but if we look at the past 30 days the markets have been stuck in the same range. The BO moved higher yesterday as Bache bought 4000 calls (some think this could be pricing for cash business rather than buying futures) but BO remains near 19% so it's not expensive even after yesterday's increase. The corn has some interesting structures, especially with the big inverses in the spreads, look to own CF-CH or CK, vs. selling the CZ.
The crush margins have moved higher in recent weeks with every board margin now over 55 cents, this would favor owning bean calls rather than products as this shows that there will be no slowdown in crushing and bean usage.