Energy Price Outlook
Look for the slow drift lower to continue in the near-term, as worries about the health of the economy and the fiscal cliff dominate. Stocks sold off yesterday on various corporate and European news items, but closed near the bottom of last week's trading range as well as close to a new four-month low. We believe that markets are re-pricing risk as well as exiting markets before the end of the year, and should continue their drift lower until any sign of progress is made either on the fiscal cliff or the economy. This should translate into lower energy prices, where we think WTI could reach $80/bbl. Fundamental pressure will come from the IEA's downgrade of global demand yesterday and elevated levels of U.S. oil production and inventories. Support will be offered by improved Chinese oil imports and reduced shipping rates in the Keystone Pipeline. API data will be released this afternoon due to Monday's holiday. We would trade the oil market as a negative affair in the near-term.
Oil markets witnessed a mixed trade early on, with early pressure offered by worries about Greece. The trend reversed by mid-morning, with support given by better earnings at Home Depot and a recovery in the Dow Industrials. Both oil and the Dow reversed back to the downside by the close, with WTI settling -$0.19/bbl and the Dow closing -59.00. Pressure was offered by worries about global oil demand and executive departures at Microsoft. Oil prices typically follow stock indexes, and yesterday's close near four-month lows in the Dow, S&P, and Nasdaq imply that further weakness will be seen in the near-term. That should cause oil prices to break down below the bottom of the two-week consolidation at $84.05.
A lot of the headlines center around the fiscal cliff, and we would agree that that is certainly an issue. Roll Call said there is some initial optimism that a deal can be reached on the cliff. The president met with labor leaders yesterday, will meet with business leaders today and congressional leaders on Friday. But before the warm and fuzzy sentiment sets in, the president also met with Moveon.org, the Center for American Progress, and the union leaders who helped him get elected. That may suggest that goals were set and payback could be in order, which would imply that not all options may be "on the table" after all. We wouldn't anticipate many developments on the cliff this week anyway, as meetings between staffs could go on for a few more weeks.
The other issue we see driving prices lower is a re-pricing of growth expectations after the election. The selloff on Nov 7th suggested that oil prices were caught leaning the wrong way and looking for either stronger growth and/or fewer regulations. A re-pricing of growth expectations is possible, as the likelihood of sub-par economic growth combined with easy monetary policy now remains in place.
Futures settled 16.9 cents higher yesterday, with the front months outperforming the rest of the curve. The initial analysis behind the move suggested that it was triggered by forecasts of cooler temperatures, however, those temperatures were centered mostly in the southeastern part of the country. Overnight and noon weather updates were actually slightly warmer than the forecasts made on Monday.
We think greater support came from inventories and technicals. The market initially began realizing that Thursday's inventory could be negative and come about two weeks before it would normally be seen. The initial consensus on Monday was for a draw of 8 bcf, and that increased to a 13 bcf draw as of yesterday. Our view is for a draw of 19 bcf and would compare to a build in the five-year average of 17 bcf. Another element of support were technical factors, which had recently shown liquidation via lower prices and falling open interest. Friday's trade broke below the 50-day MA at $3.58 which caused further selling. That changed with Monday's 6.7 cent rally, and yesterday's trade moved back above the 50-day MA early in the session. We believe that those who exited on Friday were quick to get back into long trades, and thus forced the market higher yesterday.
If these events are correct, the market may see only a bit more upside follow-through followed by a stabilization and possible selloff late in the week. Going into this week, we anticipated a test of the $3.42 key support level, followed by a rebound in the second half of the week. The upside reversal is much earlier and stronger than we anticipated, and would thus trade the market as a neutral affair today.
Global Economic & Dollar News
» German ZEW Economic Sentiment was -15.7 in Nov vs. -10.0 expected and -11.5 previously. The current situation index fell to 5.4, which was a two year low.
» There was no Greek Deal struck on Monday at the Eurozone finance ministers meeting. Expectations will now shift to a possible deal at a meeting on Nov 20th.
» German FinMin Schaeuble said that Greece's aid program can be re-engineered to plug a financing gap of €32.6B without costing creditors a cent.
» IMF's Lagarde disagreed with a Eurogroup goal of Greece getting its debt down to "sustainable" levels by 2022 (120% of GDP), saying it should be done by 2020. The real conflict stems from the haircut that will have to be taken if the goal is pushed back to 2022.
» AK Steel said that steel selling prices will be down 5% in Q4 compared to Q3 because of worsening global business conditions. It said that lower raw material costs won't fully make up for the decline in prices.
» The IEA's Monthly Report showed a reduction in its 2012 demand forecast of 60,000 b/d and its 2013 forecast of 70 kb/d. Part of the reasoning behind the reduction was the storm Sandy on the East coast. The call on OPEC was reduced by 200,000 b/d.
» China's Crude Oil Output increased 2.8% m/m to 17.9 mln metric tons in Oct which was a new record. The previous record was 17.8 mln tons set in Jan 2011.
» CERA discussed potential new oil deposits in water-logged areas of North America. A potential16 bln bbls may be there, which could boost U.S. production by a further 3.0 mb/d by 2017. The report said the technique is only profitable with crude selling for at least $100/bbl.
Upcoming Energy Events
Wed - API Inventories (4:30pm EST)
Thu - Natural Gas Inventories (10:30am EST)
Thu - EIA Weekly Oil Inventories (11:00am EST)
Nov 20th - Eurogroup meeting on Greece
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.
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
Natural Gas Commentary
Published Tuesday afternoon, 11/13/12
Natural Gas traded sharply higher settling $3.739 up $0.169, 4.5%. The curve was much firmer 13/17 $0.09 tighter. Hub cash was firmer, ~$0.11 back this morning, Z-6 up $0.30 to $4.00. Algonquin traded up to $8.75 this morning, highest spot price of the year. The 12z was in line with overnight runs showing mostly above average temperatures across the nation during the 6-10 day. The 11-15 day was significantly cooler Eastern U.S. during the 11-15 day and warmer West. Thursday we estimate a withdrawal ~15 Bcf, bullish against last year's 12 Bcf injection and the 5-yr average 21 Bcf injection.
Vol was firmer through G12 and little changed beyond: (Z12 375 20.00 21.00 37.80% 0.37% F13 385 37.00 38.50 35.43% 0.66% G13 385 49.00 50.50 35.32% 0.46% H13 385 56.00 58.00 34.67% -0.13% J13 380 59.00 61.00 32.88% -0.09% K13 385 64.50 66.50 31.98% 0.07% M13 390 69.50 71.50 31.03% -0.02% N13 390 73.50 75.50 30.71% -0.11% Q13 395 79.00 81.00 30.55% -0.16% U13 395 84.50 86.50 30.82% -0.23% V13 395 91.00 93.00 31.64% 0.29% X13 410 92.50 94.50 29.50% -0.26% Z13 425 93.50 95.50 27.69% 0.12%). Technically we are neutral, we look for $3.82 to be re-tested. Resistance is found at $3.82, $3.98. On the downside we see support at $3.65, $3.58, $3.50, $3.43, $3.36.
Published Thursday morning, 11/8/12
The overnight markets have shown stability...that's it, not a recover, only stability. The beans are trading +5-6 as of 8CSt, meal is up .50-$1, oil has increased by 15-20 points, wheat has actually eased to the lower side throughout the early morning hours and corn virtually unchanged.
The $ continues to move higher which seems to be keeping a lid on nearly all commodity markets. The other factors globally still have many on the sidelines, DC continues to threaten us that we are going over the Cliff in T-minus 48 days, EU continues to do the dance that they have done for the past 18 months, and now with the ideas that the only way taxes are going (up) there is some ideas that between now and the end of the year we could see much more farmer selling...no matter what the price but especially if the markets rally. The basis levels seems to be doing the work of flat price as the bean traded +$1 over the SF. The corn basis traded +77Z.
The weather in SA is still decent as expectations are not swaying far from the record breaking levels that have been discussed. Let us not forget that last year the SA weather really didn't become an issue for growing until December, at this point there does not seem to be any extreme problems.
The OI in corn increased by 8372, wheat was down 9237, beans were up 2395, meal was up 1501 and oil increased by 1061.
The outside markets are mixed with equities lower, crude oil is down .44, natural gas is up .01, sugar is up .03, cotton is down .30, $index is trading at a 2 month high, RBOB is down 250, the DCE is higher in beans and lower in all other markets, the Matif is higher in all markets and the MDEX finished up 21 ringgits.
The option markets remain low considering the price movement that has been seen in recent days, one must ask are grain markets shifting back into their old ways or are commodities still a hot spot. Either way if the grains are going back to the old ways then looking at spreads is something that should be the focus, the old/new spreads in beans and corn are still inverted, corn still being the more extreme. Rationing always takes place at the higher prices and demand is built at lower prices, so if the entire market is moving to lower levels one would think that it's the old crop that has farther to fall. For example the SN 11 puts are 6 cents, while the SN 18 call is 9 cents, or one could buy multiple SN puts vs. SX puts. The CH is the highest price corn at this point and if exports don't pick up (most think they will) CH 7 puts vs. CZ 13 5 puts is a small debit. The WKWN future spread is more inverted than CK-CN, (there is something to do here, probably more in futures) but look to own WK puts vs. selling WN or even possibly WZ13 calls. The BO is still over beans, which is rare, but yet the CTR on oil has a massive short, look to own some type of BOH 1x2 calls spreads such as the 50-55 for a 60 point debit for upside protection.