Energy Price Outlook
Oil prices may continue to fall in the near-term, with WTI potentially reaching $80.00 over the next few weeks. December WTI will expire today, and could lead to a similarly lopsided trade as yesterday's expiration of December Brent. However, the overall trend should remain to the downside, with pressure offered by high levels of U.S. crude stocks, still growing U.S. oil production, Tuesday's cut in global demand estimates by the IEA, weakness in the U.S. economy, and worries about the fiscal cliff. The upside will come from the inability to sell off in the past two weeks despite negative economic news, tensions in the Middle East, and by potential improvements in the Chinese economy. We would trade the oil market as a negative affair in the near-term.
Brent settled +$1.37/bbl yesterday, while WTI ended -$0.87/bbl. December Brent last traded yesterday while WTI will last trade today. The market was uninspired and was unable to rally despite militants in Gaza firing rockets into Israel and Israeli Defense forces launching air strikes into Gaza. 14 Palestinians were killed while Israel reportedly struck 175 rocket sites. Perhaps the tensions weren't quite at the intensity level as was feared on Wednesday when militants said that the "gates of hell" were opened and when Israeli leaders threatened to use the IDF in a ground offensive in Gaza. Stocks sold off again, as positions on the fiscal cliff indicated stalemate was likely. Pres Obama wants $1.6T in new taxes, which is beyond the $800B Boehner agreed to in summer 2010. Treasury's Geithner said that eliminating deductions won't be enough and will be unacceptable. Rep Barney Frank said that going over the fiscal cliff for 1-2 months wouldn't be a big deal. The president meets with congressional leaders today and is expected to present his same 2012 budget which didn't get a single vote by either party. Potential stalemate until Dec 31st is real and will reduce business activity by creating uncertainty. The Dow finished 28.57 lower while S&Ps ended down 2.16.
Outside of the expiring front month Brent contract, yesterday's trade couldn't rally on Middle East tensions. The area doesn't produce much oil, and it's unlikely that any producers will take sides. Iran is one country that could, but it is already being harmed by sanctions and needs the influx of cash. South Korea resumed imports of Iranian crude yesterday, after accepting Iran's offer to use its own uninsured tankers for transport. While those issues are a bit bearish for oil prices, WTI has been unable to fall below the bottom of the two-week consolidation range at $84.05. That could eventually indicate from a technical perspective that sellers are exhausting themselves and will eventually lose out to buyers. Another positive comes from China's cut in fuel prices effective today, which equate to around 16c/gal for gasoline. Finally, Enbridge reduced the amount of heavy Canadian crude oil being shipped on two of its pipelines by 18% for the remainder of this month. The lines terminate in Superior Wisconsin, which would imply a reduction in the amount of crude oil available to Midwest refiners.
December futures finished 5.7 cents lower yesterday in what was a day filled with ups and downs. The inventory report was slightly bearish for the market, as a 18 bcf drawdown was reported and compared to a 24 bcf draw expected. The market went from 3-4 cents higher prior to the number to 7 cents lower within the first few minutes. A rally later ensued which pushed prices 7 cents higher on the day, but that deteriorated as the day progressed and the market ended near the day's low. It's possible that the "scare" of an inventory drawdown two weeks before the end of the injection season caused technical-focused traders to pile into the long side, but now the focus may change again toward above-normal temperature forecasts for the next 1-2 weeks.
NOAA's midday update yesterday was warmer than originally anticipated, and NOAA's 6-10 and 8-14 day maps also showed a large area of above-normal temps engulfing the western three-quarters of the country. It's possible now that if the HDD data published next week show a significant enough drop that a build in inventories could take place. After a 26 cent rally in the first three days this week, the market doesn't seem prepared for a build in stocks after this week's "surprise" draw. We were hoping to get a sale in NGZ2 at $3.90, but yesterday's high reached only $3.83. We would still take a "sell the rallies" view on trade, but wouldn't get too bearish. The withdrawal season will be in full swing in two weeks, and may offer solace to the bull case.
Global Economic & Dollar News
» China's New Leadership showed Xi Jinping as the incoming president and controller of the Central Military Commission. Outgoing President Hu Jintao was expected to take that position.
» U.S. Initial Jobless Claims were 439K vs. 361K previously (revised up from 355K). The surge was caused by increased claims tied to Hurricane Sandy. Continuing claims were 3.334M vs. 3.163M previously (revised up from 3.127M).
» Empire State Survey was -5.22 in November vs. -6.16 previously. It was the fourth contraction in a row.
» U.S. CPI was +0.1% m/m in Oct vs. +0.6%. The y/y rate increased to +2.2% from +2.0% previously.
» Philadelphia Fed Survey was -10.7 vs. +2.0 expected and +5.7 previously. It said that the number was affected by Hurricane Sandy. Employment was -6.8 vs. -10.7 while new orders were -4.6 vs. -0.6.
» The Fiscal Cliff essentially sees the two sides far apart, with Pres Obama wanting $1.6T in new taxes, which is beyond the $800B Speaker Boehner agreed to in summer 2010. Democratic leaders said that eliminating deductions won't be enough and will likely be unacceptable.
» Rep Barney Frank said that going over the fiscal cliff for 1-2 months wouldn't be a big deal.
» China Will Cut Fuel Prices on Friday by $50/ton in the first cut since July. The cut equates to around 16c/gal.
» South Korea resumed imports of crude oil from Iran, after Iran offered to ship it using its own tankers. The country cut imports on July 1st as part of the EU sanctions package.
» Gaza Militants exchanged rocket fire for air strikes from Israel yesterday in the aftermath of Wednesday's killing of a Hamas leader by Israel.
» Natural Gas Inventories were -18 bcf vs. -24 bcf expected. Inventories are 209 bcf (5.65%) above the five-year average vs. 244 bcf (6.62%) above it last week. The drop came about two weeks before normal and had boosted gas prices earlier this week. However, the smaller-than-expected decline was enough to pressure the market by about 10 cents in the immediate aftermath.
» The Natural Gas Market is well supplied, according to the Federal Energy Regulatory Commission. It said that gas prices may stay high in Southern California due to the idling of Edison International's San Onofre nuclear plant.
» Oil Movements said that OPEC seaborne shipments will rise 700 kb/d in the four weeks ending Dec 1st and reach the highest level since April.
» Heavy Canadian Crude Oil fell sharply yesterday after Enbridge reduced the amount of crude that flows on two of its pipelines by 18% for the remainder of this month. The two lines have a combined capacity of 1.25 mb/d and run from Hardisty Alberta to Superior Wisconsin.
Upcoming Energy Events
Tue - Eurogroup meeting on Greece
Tue - Bernanke Speaks
Tue - API Inventories (4:30pm EST)
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - Natural Gas Inventories (10:30am EST)
Dec 12th - OPEC Meeting
Dec 12th - FOMC Meeting and Press Conference
EIA Inventory Review
EIA oil stocks were reported to have gained 1.1 MB in yesterday's report, which fell short of the consensus increase of 2.6 MB. The number was fairly in-line with the 1.4 MB reported by the API on Wednesday, but it greatly exceeded the decline needed in order for the EIA data to match the API's. As a result, it could be taken as bullish, neutral, or bearish depending on which number the report is compared to, and that summarizes the market's relatively sideways reaction to the data. The biggest headline from the numbers was distillate inventories, which fell short of consensus by 1.6 MB. That helped the heating oil market to gain in the wake of the report, and was one of the standout factors on the bullish side. Another one was an increase in overall oil demand, although it was mostly caused by a recovery following Hurricane Sandy. Despite these bullish points, crude oil inventories increased their divergence with the five-year average to the widest level of the year, which could add pressure on the market in the end. 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 +1.1 MB vs. +2.6 MB expected. The number was pressured by an increase in demand of 975 kb/d on the week, which was mostly the result of a return to normal after Hurricane Sandy. Demand has increased 1.02 mb/d in the last two weeks, and compares to a loss of 1.19 mb/d in the prior two weeks that surrounded the storm. Imports also pressured inventories by falling 141 kb/d. Oil production gained 32 kb/d and is now the highest since Apr 29th, 1994 (compared to Dec 23rd, 1994 last week). Despite the bullish takeaways from increased demand and stronger refinery utilization, oil inventories are now 44.33 MB above the five-year average compared to 41.96 MB above it last week. That's now the widest divergence for the year, and compares to the previous high of 42.08 MB set in mid-June.
Gasoline stocks were -0.4 MB vs. -1.0 MB expected. Demand increased by 601 kb/d and took away from inventories. Imports and production both contributed to inventories by gaining 328 kb/d and 211 kb/d respectively. Gasoline stocks are now 1.07 MB below the five-year average compared to 0.78 MB below it last week. The number was fairly neutral for gasoline prices in our view.
Distillate stocks were -2.5 MB vs. -0.9 MB expected. The number was pressured by an increase in demand totaling 517 kb/d, which has more than fully recovered following Sandy. Imports increased 145 kb/d and contributed to inventories, along with a 9 kb/d increase in refinery production. The inventory number was positive for heating oil prices, in our view, and prices rallied initially. However, the market began falling within an hour of the report as the stock market took another dive.