The Energy Space



 | Nov 19, 2012 | 8:43 AM EST
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Energy Price Outlook

Oil prices have held within a roughly $2.50/bbl trading range in the past seven days since the initial post-election $4.27/bbl washout on Nov 7th. While the Israel/Gaza conflict has been supportive for the market, it has only been a factor in the last two days of last week. Given the inability to fall on negative news and now the bullish developments in the Middle East, it's tough to determine whether the next move in crude will be up or down. We still lean toward the downside in our bias, but it's very tentative. Pressure will be offered by high levels of oil inventories, an 18 1/2 year high in U.S. oil production, weakness in economic data, and weakness in the stock market. The bullish case rests on the inability to fall, as well as on the potential for escalation of the conflict in the Middle East.

The new front-month January WTI futures settled $1.05/bbl higher on Friday, with the expiration of the December contract helping out the front months. The oil market didn't seem to be concerned about the Middle East on Thursday as WTI fell 87 cents, but it certainty was on Friday. Crude traded slightly lower overnight as a cease fire took hold in the Middle East. A rally began at around 7:45 am EST when news of a long-range rocket headed for Tel Aviv broke and thus broke the cease fire. The rocket landed in the sea, but shortly thereafter, Israel announced that it had begun drafting 16,000 troops and could call up as many as 30,000. Iraq's representative to the Arab League said that oil should be used as a weapon, but the comments were dialed back shortly thereafter, possibly due to pressure from countries more friendly to the U.S. It's difficult to assess the potential impact of this on the oil market. The countries affected don't produce much oil, and Saudi Arabia could help by making up for any shortfalls. Additionally, the parties involved may be fearful of a repeat of the Israeli operation in Gaza in December 2008 where 1,100 Palestinians and 12 Israelis were killed.

Worries about the fiscal cliff added pressure to the market through the first half of the day, before a short press conference took place around 11:40 am EST. Congressional Leaders said at the briefing that talks were "constructive" and "productive." Harry Reid said he's not in favor of waiting until the end of the year. Economic advisor Gene Sperling suggested at a separate briefing that any fiscal deal would require "well over $1T in revenues." The statement may have been a softening of the approach Pres Obama took earlier in the week where he demanded $1.6T in new taxes. Sentiment following the 11:40 press briefing completely changed from what was witnessed earlier in the week. By the same token though, the Dow went from 71 points lower at its bottom to 46 points higher at the close. Prices are still 657 points below their pre-election close and signal that the market may still be re-pricing a higher tax and/or slower growth environment. That could weigh on energy markets as well.

Natural Gas

December futures ended 8.7 cents higher on Friday, with forecasts for below-normal temps in the eastern half of the U.S. over the next 11-15 days offering support. The forecast was made by Earthsat and was supported by NOAA's latest maps which shown the area of below-normal temps in the Southeast expanding compared to Thursday's map. Some support was also given by the CPC's long-range forecast which showed that temps in Dec-Jan-Feb may be below-normal in the northern plains and above normal in the south and southwest portions of the country. The outlook was colder than forecast previously, and caused heating demand expectations to be increased.

We discussed selling rallies in Friday's report near $3.90. This week's trade may seen an inventory build based on warmer temperatures that dominated, and push prices lower. However, the shift on Friday toward a colder dynamic could argue for the positive case at least by week's end if not sooner. We'd trade gas as a neutral affair during this week.

Global Economic & Dollar News

» A Cease Fire Proposed by Egypt was violated by militants in Gaza, who fired more rockets while the Egyptian prime minister was in the country. It lasted only three hours. Israel said it has begun drafting 16,000 troops and may call up as many as 30,000, which is a precursor to a possible invasion. The action has so far killed 22 Palestinians and 3 Israelis.

» Iraq's Representative to the Arab League said on Friday that Arab states should use oil as a weapon to put pressure on the United States and Israel over the attacks on Gaza. That statement was later dialed back a bit to say that no specific actions would be proposed.

» The Budget Sequester may be replaced with a short-term plan, according to White House officials.

» Economic Advisor Gene Sperling said that any fiscal deal would require "well over $1T in revenues." The statement may have been a softening of the approach Pres Obama took earlier in the week where he demanded $1.6T in new taxes.

» Industrial Production was -0.4% in Oct vs. +0.2% expected and +0.2% previously. The Fed said that Sandy cut output by almost 1 percentage point.

» Congressional Leaders said at a press briefing following talks on the fiscal cliff that talks were "constructive" and "productive." Harry Reid said he's not in favor of waiting until the end of the year.

Energy News

» An Offshore Oil & Gas Platform owned by Black Elk Energy caught fire off the coast of Louisiana. Two were killed and two are missing in the incident. The platform was not producing oil at the time.

» The IAEA said that Iran is doubling production enriched uranium to make a nuclear weapon.

» Natural Gas Rig Counts increased 4 to 417 while oil gained 1 to 1,390. Horizontal rigs were up 1 to 1,105.

Upcoming Energy Events

Mon - Existing Home Sales, NAHB Survey

Tue - Eurogroup meeting on Greece

Tue - Housing Starts, Bernanke Speaks (12:15 pm EST)

Tue - API Inventories (4:30pm EST)

Wed - EIA Weekly Oil Inventories (10:30am EST)

Thu - Natural Gas Inventories (10:30am EST)

Fri - German IFO Business Climate

Dec 12th - OPEC Meeting

Dec 12th - FOMC Meeting and Press Conference


EIA Inventory Preview

Whatever the result of Wednesday's inventory numbers is, the key indication will likely be the comparison of oil inventories with their five-year average. That increased to 44.33 MB above the average in last week's report, which was the highest in two years. We look for a decline this week that's in-line with the five-year average drop of 0.7 MB. The DOE's figure is still some 2.9 MB above that of the API, which will offer pressure, as will increased refinery output. Most refineries in the Northeast have ramped up to normal output levels with the exception of Hess's 70 kb/d and Phillips 66's 238 kb/d facilities. Hess began restarting late last week, while the latest on Phillips 66 is that a restart is expected between Nov 19th-26th. Some boosting effect on inventories could come from demand, where a slight pullback is possible after last week's surge. Demand will be difficult to predict, however, as reverberations from Sandy are still occurring. Gasoline demand should stabilize too, which could help stocks increase 1.0 MB this week. Gasoline imports could maintain a recovery from Sandy and show another increase. Distillate inventories typically show a decline this week before rebounding through year-end. That could certainly be the case again, as demand has already recovered in the wake of Sandy.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Grains Commentary

Published Friday morning, 11/16/12

Just when some thought it was safe to play in the pool again the Chinese announce a cancellation of 600.0mt of beans. The bean market has been pressed all night on this and trading down 20 as of 8CST, meal has lost $5-6, oil is down 40-50 points, corn is down 5-6 and wheat is down 2-3.

The announcement of the cancellation has not been confirmed and the weekly sales data this morning still shows 559.0mt of beans sold and 234.0mt of meal sold, both of these figures are better than expected. The reality is that somehow the Chinese have figured out a way to re-negotiate these contracts rather than outright cancel them. If there was truly cancellations they would have to be announced through the USDA at some point and remember earlier this week they actually purchased 120.0mt.

The weather in SA has pockets of concern but when planted acres are as massive as they are there will always be pockets of concern, in reality when one needs to dig deep to find a problem the problem probably is not that much of a concern and as of now this is what is taking place with SA weather. We would point out that it is still very early in the game and last season the concerns did not start until middle of December.

The basis levels continue to rise in both beans and corn as the river situation is very difficult to figure out. The big break in flat price will most likely keep movement slow and basis strong which will keep future spreads strong.

The OI in corn fell by 1809, wheat is up 1624, beans are up 562, meal is up 3179 and oil is down 881.

The outside markets are mixed with equities higher, crude oil is up .79, natural gas is down .01, RBOB is up 150, $index is stronger, cotton is up .16, gold is down $2, DCE is higher in beans and corn but lower in meal and oil, the Matif markets are lower in cornand rapeseed but wheat is higher and MDEX finished down 38 ringgits.

The option market has some interesting dynamics. The December options expire one week from today and even though volatility levels are not as interesting with only a few days left one must look at risk/reward. The WZ volatility is 19.5%; this is the lowest wheat volatility in 9 years and is now cheaper than corn, beans, meal and even bean oil. The CN skews seem very flat, this seems to favor buying calls selling puts with futures, though saying this, the future spreads have some big inverses still (CN-CZ13) and as history shows these either collapse or have a blow off top, and recently they have collapsed. Look to buy 2 CZ13 8 calls vs. selling 1 CN 8 call for even $ and have a small future spread length on against it, as we know on a big rally basis will collapse and the spreads should also fall apart. The bean structure is similar but intriguing on the downside as the SN puts are very low, look to own SN puts and use futures according to market view. The bean oil has a massive future short along and with all the discussion of Chinese crush margins being so bad it could mean they buy oil, could Jefferies actually be the Chinese buying 20k of the BOF calls?

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