Energy Price Outlook
Oil prices are expected to generally trend lower over the next few weeks, with WTI potentially falling toward $80/bbl and Brent toward $100/bbl. The prospect of sub-par economic growth should remain a negative catalyst along with potential increases in carbon and alternative energy legislation, weak signs of investment in oil futures, and high levels of oil stocks and production. Support will be offered by potential progress in fiscal cliff negotiations, progress in Europe, and from the possibility that the Chinese economy recovers.
Yesterday's trade finished 65 cents higher in WTI while Brent gained 43 cents. The rally began around 11:15 am EST on little news except that Nigeria's Qua Iboe exports loading from end-Oct to December are delayed by 4-9 days. Such a story would be more positive for Brent than WTI, but that wasn't the case. A rumor surfaced later that the Russian defense minister had tweeted that an explosion took place at Iran's Bushier nuclear plant. But the tweet was considered a hoax because PM Putin's inner circle doesn't tweet and the account was set up one day before. We would attribute the rally to a bounce following Wednesday's $4.27/bbl selloff.
More weight seemed to be given yesterday to the fiscal cliff as the reason behind Wednesday's selloff, rather than the Greek austerity vote and worries over Spain's problems spilling into Germany. Issues with Greece and Spain have been around all year, however, and the Greek vote was successful later in the day. The new information on Wednesday came from the election, in our view, and could adversely impact energy prices going forward. The issue will be the likelihood of slow growth and four more years of either big government (like 2009-2010) or ineffective government (like 2011-2012). Current prospects of Keystone XL approval are low too, and may also have explained WTI's out-performance of Brent yesterday. Of course, the fiscal cliff discussions are an issue, but so to will be how much compromise is struck.
The fiscal cliff is the expiration of the payroll tax cut (social security), Bush income tax cuts, Bush dividend/capital gains, and the sequestration. The CBO said the economy will contract as much as 0.5% next year if Congress fails to stop the fiscal cliff from occurring. The president didn't deal with it earlier this year because he campaigned on hiking taxes in the expectation that he would secure both houses of congress. That didn't happen, and republicans face mid-term elections in two years while the president does not. His hand may be stronger and he's an ideologue, which may signal he'll stick to his guns. He didn't pivot after the 2010 midterms, so chances may be low now. Both Boehner and Reid signaled compromise on Wednesday but the issue is far from settled. We think that the threat of the fiscal cliff and slow economic growth will weigh on energy demand and therefore prices for the foreseeable future.
December futures rose 3.0 cents yesterday after inventories showed an increase of just 21 bcf. That fell short of the consensus expectation of +27 bcf and helped the market rally about five cents afterward. The rally continued as the session progressed, but the market only ascended to the highs made during the past two sessions. Some support was seen in the session's second half from NOAA's updated outlook on temperatures, which showed that October was 0.3 degrees below normal and broke the 16 month streak of above-normal temps. NOAA also showed less likelihood of El Nino forming this winter but did not say that La Nina was likely though. El Nino typically suggests above-normal temps in the western portion of the country and below-normal temps in the southeast.
Power outages associated with the Nor-easter totaled only around 150,000 according to the DOE. 600,000 customers in the Northeast are still without power due to Sandy. The lack of power demand and near-term forecasts for above-normal temperatures suggests that the market may find pressure in the near-term. The positive side could be boosted by the dropping of the El-Nino watch, however, we would not feel comfortable being positive on gas prices at least until the long-range forecasts are updated by the CPC in a week or two.
Global Economic & Dollar News
» China's Outgoing President Hu Jintao said in a speech yesterday that he wants to make China's development much more balanced and should double its 2010 GDP and per capita income for both urban and rural residents by 2020.
» China's Next Leader is likely to be VP Xi Jinping.
» PBoC's Zhou said that the Chinese economy was showing signs of improvement.
» Greece's Parliament passed its package of austerity and economic reforms late on Wednesday. A vote on an austerity budget will take place on Sunday, but should be assured after Wednesday's vote.
» Spain's Auction yesterday drew better than expected demand. Despite that, yields increased around 14 bp after Market News reported that OMT activation appears unlikely this year. The thinking is that if Spain can sell in the open market, it doesn't need the ECB to buy its bonds.
» Initial Claims were 355K vs. 365K expected. Continuing claims were 3.127M vs. 3.262M previously. The number was pushed down by reduced claims amid power outages at state offices following Hurricane Sandy, according to the Labor Department. The department also said that other states that didn't see as many power losses processed more claims.
» Nigeria's Qua Iboe Exports loading from end-Oct to December are delayed by 4-9 days.
» Shell Shut part of its 300,000 b/d pipeline running westward from Houma Louisiana to Houston Texas in order to reverse flow. The project should be completed in early 2013.
» Natural Gas Inventories were +21 bcf vs. +27 bcf expected. Inventories are 244 bcf (6.62%) above the five-year average vs. 259 bcf (7.10%) above previously. Total inventories are now 3.929 tcf, which is another new record high. There are about two more weeks left to the injection season and the next two five-year averages show increases of 14 bcf and 3 bcf.
» NOAA dropped its watch for El Nino for the next four months but did not say a La Nina would take place instead.
Upcoming Energy Events
Sat - Chinese Trade Data
Sun - Greece Parliament Vote on Austerity Budget
Mon - Eurozone Finance Ministers Meeting
Tue - IEA Monthly Report
Wed - API Inventories (4:30pm EST)
Thu - Natural Gas Inventories (10:30am EST)
Thu - EIA Weekly Oil Inventories (11:00am EST)
Nov 20th - Bernanke Speaks
Dec 12th - OPEC Meeting
Published Thursday morning, 11/8/12
The overnight markets have been fairly benign as trading ranges have been narrow with minimal volume. The beans have traded both sides of unchanged with the market hovering near unchanged at 8CST, meal is down slightly in the nearby while slightly higher in the deferred, oil is modestly higher, corn is marginally higher and wheat is up a few cents. The Matif wheat market is still on the front page of news as it posted another contract high today making that 4 consecutive days of contract highs.
The USDA will release its monthly S&D figures tomorrow morning and with nearly all the harvest done one would think that the data on tomorrow's report shouldn't change too much into January...think again. History shows that there can be some radical changes from November to January. For tomorrow's report it is estimated that the bean and corn yield will increase modestly, beans are expected to be near 38.5 while corn will be 122.1. The data that we receive would agree that the bean yield is on the rise while the corn data would not, in fact the data we collect for corn yields would actually point to a slight decrease in overall yield. The harvested acreage is also a number that is nearly impossible to get your arms around and most likely the figures tomorrow will the similar to the figures of a month ago. The harvest figures are expected to drop in the December S&D report. The CO figures are also interesting, even with an increase of yield for beans the projected CO figures are unchanged at 130, and this points to both a very robust export markets as well as profitable crush margins in the US.
The weekly sales data for the most part is disappointing with corn still having only 157.0mt, wheat is 209.mt, beans are poor at 186.4 while meal continues to be robust at 194.0mt and oil had an impressive week at 36.4mt. The bottom line to all of this is that with such big product sales what the beans may loss on the export channel will quickly be absorbed in the domestic crush pace. There was an announcement of 152.0mt corn sale this AM, as we have mentioned over the past few days the US is getting closer to doing much more export business in corn.
The basis in beans and corn both increased again yesterday with bean basis at the Gulf trading as high as +96 over the SF.
The outside markets are mixed with equities higher, crude oil is up $1.09, RBOB is up 2.40, cotton is up .29, the DCE is lower in all the soy markets but higher in corn, the Matif markets are higher in every markets with wheat posting another contract high and the MDEX finished 25 ringgits higher.
The OI increased in corn by 4180, wheat was up 18548, beans were up 4572, and meal was up 171 and oil dropped by 884.
The option market continue to waffle around as price direction remains in the same ranges, we would point out that even with price movement from week to week being flat the daily moves that are required to justify these current levels have been paying. The downside bean puts continue to be cheap at 19%, for those who think that beans could fall hard (with SA still doing well this is a possibility) look at buying 5 SF 14 puts vs. selling 1 SF 15 put at even $, there are 2x1 SH put spreads that also seem like value. We find it interesting that trade seems extremely bearish new crop beans and corn while these are the cheapest flat price commodities and at the same time WZ13-CZ13 is trading at its widest levels at $2.65. With the future spreads still being heavily inverted owning the nearby gamma vs. the deferred Vega still seems attractive. There has been massive call buying in bean oil recently with Bache buying over 15k calls but yet volatility is still under 20%, not sure what to make of bean oil but future volume has been massive in recent days as are the options...something is going on but can't put a finger on it yet. The wheat is wheat...it's starting to brew and has the making for a 7-10% volatility spike coming soon. With the USDA report tomorrow the CF options at 21% seem like the best value, or look at doing some calendar spreads of buying CF vs. CH just for tomorrow's report.