Energy Price Outlook
After a sobering week last week, oil prices are expected to be under pressure again in this week's trade and potentially fall toward $80/bbl in WTI over the next few weeks. The dominant factors should be increased prospects for slow growth in the U.S., uncertainty over the fiscal cliff, events in Europe including Sunday's vote in Greece, and OPEC's cut in demand estimates on Friday. The bull case rests on any breakthroughs in the above issues as well as some signs of improvement in Chinese economic data. We'd look for prices to drift lower in this week's trade.
A joke began circulating on Thursday after McDonald's reported same store sales that showed the first decline since 2003. The joke was that the economy is getting so bad that its 99 cent meal deals were no longer affordable. Friday's settlement in WTI was 98 cents higher and may not be much better. Brent finished $2.15/bbl higher on Friday. It was a sobering week overall, as expectations going into Tuesday's election appeared to favor Mitt Romney as the winner. With Mr. Obama in office for another term, prices fell $4.27/bbl on Wednesday on the prospect that the economic recovery continues at a trickling pace rather than anything resembling a gusher. A second issue was the fiscal cliff, which received mixed indications on Friday. Speaker Boehner said that raising tax rates would hurt the economy and job growth but that he's open to raising revenue through other means. President Obama spoke later and said that he's open to compromise but added that rates must be raised and that he wouldn't accept any proposal that wasn't balanced. The president's words were seen as less conciliatory and both energies and stocks weakened. That could be adverse for energies, unless it is just talk before a deal is made. It's believed that talks have already begun at the staff level, and there are some hints that the summer 2010 deal between Obama-Boehner could be resurrected. It's unclear though whether the "goalpost" will be moved again.
The upside will look to any progress on a deal or any change in the tone in Washington. The president may not want to budge, as Republicans face an election in two years whereas he does not. It's a tough call. The upside could also look to improvements in Chinese economic data reported on Friday. CPI fell to 1.7% from 1.9% and may provide room for stimulus. Industrial production was +9.6% vs. +9.2% previously. Chinese auto sales fell slightly to 1.30 mln units from 1.32 mln but came in marginally above the 1.28 mln expected. The chart below compares auto sales against Chinese oil demand and shows that while auto sales have been flat for two years, they're not sinking. It could be a marginal positive for Chinese oil demand.
Gas prices fell 10.5 cents in Dec futures on Friday, with the front months underperforming the backs. The catalyst may have been forecasts for warm weather, which has been developing over the last few days. After the passage of the Nor'easter on Wed/Thu, temperatures in the Northeast are forecast to reach the 60's over the weekend followed by a drop to highs near 50 degrees in days 5-10. Chicago has highs in the mid-40s during that period, but is under the zone of above-normal temps in NOAA's 6-10 and 8-14 day forecasts. The outlook for warmer weather caused the market to trade lower during the session, with a burst of selling seen in the middle of the session when the 50-day MA was broken. The average offered support at $3.56, and may be a signal of more selling to come. Open interest has been steady-lower for the last two weeks now, so technical-based traders may be invigorated by the combined break of the 50-day and falling open interest.
The market's price structure weakened last week, as the Dec '12/Dec '13 spread fell to a 59.5 cent contango from 58.0 cents a week ago and 53.8 cents a month ago. Summer month contracts are now trading further above winter months, which suggests that the market doesn't anticipate a cold winter. On Thursday, NOAA lifted its El-Nino watch which would be bullish for gas, however, it's likely that the market is waiting instead for further signals from NOAA's long-range forecast in a week or two. That could keep the market under pressure this week, however, the next support is at $3.42, which is only 8 cents below Friday's close.
Global Economic & Dollar News
» Chinese CPI was +1.7% vs. +1.9% previously. Industrial production was +9.6% vs. +9.2% previously.
» Chinese Auto Sales were 1.30 mln units vs. 1.28 mln expected.
» European Industrial Production numbers were weak on Friday, with France reporting -2.7% vs. +1.9% and Italy -1.5% vs. +1.7%. Germany reported on Wednesday that production fell 1.8%.
» Basel III Regulations will not take effect in Jan '13 as planned, according to bank agencies.
» A Philadelphia Fed Survey of 39 economists showed expectations of a slow economy in Q4 that holds near current levels of growth. Forecasters also downgraded their 2013 GDP estimates to 2.0% from 2.1%. They estimate Q4 unemployment to be 7.9%, which is slightly below 8.1% previously forecast.
» University of Michigan Preliminary Sentiment was 84.9 vs. 82.9 expected and 82.6 previously.
» Speaker Boehner said that the fiscal cliff is an opportunity for Pres Obama to lead. He said that if he works out a deal, he would have no problem getting it passed in the House. Said raising tax rates would hurt the economy and job growth but he is open to raising revenue through other means.
» Pres Obama said that he's open to compromise on a solution to the fiscal cliff, but he refused to accept any proposal that wasn't balanced. He said that tax rates must be raised. Jay Carney later said that the president will veto any bill extending tax cuts for the wealthy.
» OPEC's Monthly Report cut its demand view for its crude in 2013 by 20,000 b/d. It said it had economic concerns as well as concerns over rising output by rivals.
» Natural Gas Rig Counts fell 11 to 413 last week, according to Baker Hughes. Oil rigs increased 16 to 1,389 while horizontals fell 1 to 1,104.
» Diesel Exports to Europe may fall during the next two weeks because of a shortage of tankers caused by Hurricane Sandy. Shipbrokers report that 12 vessels will ship 456,000 metric tons of diesel and heating fuel in the two weeks ending Nov 22nd compared to 17 vessels shipping 646,000 tons through Oct 26th.
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
EIA Inventory Preview
Crude oil stocks are anticipated to drop 0.5 MB this week compared to a 1.3 MB decline in the five-year average. The biggest factor in this week's numbers will be refinery utilization, in our view, as it was the most significant in last week's inventory increase. Seven refineries were shut or went to reduced rates in that week due to Hurricane Sandy and five returned to full processing rates last week. The return of refining should reduce inventories as more oil is processed. Imports were surprisingly higher last week and grew the most on the east coast despite the storm. It's difficult to assess the import situation this week when the closure of ports in NY led to increased imports while the reopening of the Keystone pipeline in the Midwest led to a decrease in PADD 2. Gasoline inventories benefited from Sandy in last week's report by gaining 2.9 MB. The east coast fell 1.2 MB while the Gulf Coast saw the largest increase of 4.6 MB, likely due to the shutdown of the Colonial pipeline. The restart of that pipeline along with the inability of refiners to deliver gasoline to end-users could lead to another build this week of 0.8 MB. Distillate inventories could grow as well and we're looking for a build of 0.5 MB.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures