Energy Price Outlook
The slow drift lower in oil prices should continue in the near-term, as worries grow over the fiscal cliff and the slow rate of economic growth. WTI could fall toward $80.00/bbl over the next few weeks as fiscal cliff negotiations appear likely to continue through the end of the year, U.S. production continues to grow, U.S. inventories remain elevated, and as problems in Europe remain in place. Some support may be offered by the slow normalization of refinery operations in the Northeast U.S. and by yesterday's reported recovery in Chinese oil imports. The import recovery doesn't always translate into higher prices though, as we look at in the Analysis section below. We think prices will maintain their drift to the downside in the near-term.
WTI settled 50c/bbl lower yesterday while Brent finished down 33c/bbl. Trade was relatively quiet due to the Veterans Day holiday in the U.S., and prices created an inside day. The import data from China showed a 14.1% increase in Oct from Sep levels. The level of imports was 5.599 mb/d, which was just 425,000 b/d below the record set in May of 6.024 mb/d. The recovery will suggest that the Chinese economy is improving and will help prevent oil prices from falling too far below the $80/bbl level in the near-term, in our opinion.
The month-to-month swings in Chinese imports don't always translate into the expected price action in oil markets, as we show in the Analysis section below. Additional pressure may come from yesterday's report from the IEA, which suggested that U.S. oil output will surpass that of Saudi Arabia's by 2020. The report also suggested that natural gas will overtake crude oil as the most used fuel in the U.S. by 2030. Both suggestions indicate that oil prices may remain under pressure in the long-term.
Short-term pressure could also be added by worries over the fiscal cliff. Republican Speaker Boehner received pressure over the weekend from other members of his party to not give in so easily on tax increases. At the same time, Democratic Senator Patty Murray said that her party should be willing to go off the fiscal cliff in order to secure tax hikes on the rich. The back-and-forth is probably just political cover while real negotiations are likely taking place at the staff level. It's probable that the tax hike threshold will be raised to $500K or $1M instead of $250K in exchange for the closing of loopholes that Republicans want. If such a deal were to come before December 31st, it would help avoid a similar $20/bbl selloff which was seen in Aug '11 when the president and the speaker were last engaged in similar negotiations on the debt ceiling. However, until there is a deal in place, energy markets will be under pressure. The president meets with labor leaders today, business leaders Wed, and congressional leaders on Fri.
December futures settled 6.7 cents higher yesterday and slightly outperformed the back months of the curve. The market rebounded on forecasts for colder temperatures by private forecasters, while the NOAA 8-14 day outlook had below-normal temps only in the Southeast. The majority of the remainder of NOAA's maps showed the country under above-normal temps, which has been the case for at least the last two weeks.
Prior to rebounding in the pit session yesterday, the electronic trading session showed prices fall to a five-week low at $3.47. We had anticipated a drop to the Sep 13th high at $3.42 before a rebound could take place. It's difficult to say now, however, whether yesterday's bottom will hold in the near-term. Friday's COT data showed further liquidations by large funds, with managed money traders selling 19,997 contracts, and non-commercials selling 9,036. Open interest figures have moved steadily lower since the market peaked on Oct 19th. Prices fell 44.4 cents through Friday while OI had liquidated 42,000 contracts. Sharp changes in trend in OI can usually provide a good signal of a reversal.
We want to lean positive on gas prices, but only from the key support level of $3.42. Our forecast for inventories this week is a draw of 19 bcf, which compares to the five-year average build of 17 bcf. Such a draw would come two weeks before the typical end of the injection season. It would also make last week's reading the new record high, and put it at just 77 bcf above the 2011 record high. That would fall far short of the worries that existed earlier this year for a new record that was some 400 bcf or so above the old record.
Global Economic & Dollar News
» China's Trade Balance was +$31.99B in Oct vs. $27.67B in Sep. Exports rose 11.6% y/y while imports were +2.4% y/y.
» Greece's Parliament passed its austerity budget on Sunday.
» The Troika said that Greece may need an extra €15B through 2014. It added that it sees "very large risks" to the Greek program.
» China's Crude Oil Imports were +14.1% m/m and +13.8% y/y in Oct vs. +12.8% and -1.8% respectively in Sep. The daily rate of imports was 5.599 mb/d which was the third highest on record. The peak was 6.024 mb/d set in May '12.
» Iran launched its biggest ever air drills yesterday.
» The IEA's World Energy Outlook said that U.S. oil output will overtake Saudi Arabia's by 2020.
» IEA's Fatih Birol said that oil prices are likely to stay at about $100/bbl.
» The IEA said today that natural gas will overtake oil as the most used fuel in the U.S. by 2030 as supplies continue to grow. It added that the EU's natural gas imports will increase by 21% by 2020.
» Truck Terminals in new Jersey are still facing high wait times to load trucks with fuel. The average wait time is about 50 minutes currently and compares to around 20 minutes normally. Still, the wait time is down from 2-4 hours which was seen in the middle of last week. Seven fuel terminals remained idle in NY and NJ as of yesterday morning.
» Goldman Sachs raised its 2013 natural gas forecast to $4.25 from $4.00, saying that the necessary tightening correction in the supply-demand balance has materialized.
» The Keystone XL Pipeline will be approved by President Obama, according to Moody's, but the approval will not be quick.
Upcoming Energy Events
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
Chinese Oil Imports Rebound
One of the more frustrating events one can have in the markets is developing a hypothesis and testing it, only to find that the conclusion runs counter to accepted wisdom. Chinese oil imports are one such indicator and may confuse the price outlook. Over the weekend, the government reported a 14.1% m/m increase in oil imports in October, which compared to a 12.8% gain the previous month. The two solid monthly gains contrasted with three consecutive monthly declines in June-August, but oil prices have moved in the opposite direction as implied by the numbers in both periods. The oil market rallied in July-September when the June-August numbers showed deterioration, while prices sold off in the last two months as imports rebounded.
The import data has shown consistent increases since around 1999 when imports began that year at a lowly 320,000 b/d. Since working their way up toward 6.0 mb/d in the 13 years since, it's safe to say that demand growth from China has had a large impact in driving oil prices up from $12.05/bbl at the beginning of 1999 to $147/bbl in 2008 and $85/bbl currently. The table below shows the change in imports followed by the price action in WTI on the first day after their release, the fifth day, and the tenth day. They don't show any kind of relationship, with the market advancing by day five in only five of the last nine months. The tenth day has advanced only four of nine months. Despite the poor results of the study, we would still not hesitate to argue that the improvement in Chinese imports as well as the potential for more stimulus activities may offer support to oil prices in the near-term.
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.
Natural gas inventories are anticipated to fall 19 bcf this week, compared to a five-year average build of 17 bcf. The predicted draw would end the injection season two weeks early. Such a reduction in inventories may not appear to be in-line with the above-normal temperatures that were forecast by NOAA during the last two weeks, however, stronger demand for heating likely took place in the eastern population-weighted consumption areas where cooler temperatures were observed. A 19 bcf draw would put inventories at 3,910 bcf, and would make last week's reading of 3,929 bcf a record high for the year. That would be only 77 bcf above last year's record, and end the injection season with a much smaller surplus than was feared earlier this year. It could become a bullish catalyst later this week.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures