The Energy Space



 | Nov 21, 2012 | 8:43 AM EST
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Energy Price Outlook

The selloff in oil prices yesterday almost fully unwound the rally made on Monday as the buildup of fear subsided. The market may now be in a similar position as it was on Friday, which basically showed concern about Middle East tensions growing, some hope about a deal to avert the fiscal cliff, growing levels of oil stocks, and increasing oil production. These may all argue in favor of lower prices in the near-term, as the supply/demand balance is still angled toward surplus. Oil inventories will be released today at their normal time, while natural gas will be out today at 11:00am EST. The upside for oil markets rests in the chances for better demand as potentially indicated through an improving U.S. housing market and recovering Chinese economy. API data was positive yesterday afternoon. Technicals are mixed in WTI, with support coming from a bullish channel and the basing pattern at $84.05 while pressure will come from yesterday's hold at the 50-day MA and potential liquidation shown through falling open interest. Prices may fall toward $80/bbl over the next few weeks.

January WTI ended $2.53/bbl lower yesterday while Brent finished down $1.87/bbl. The selloffs unwound rallies of $2.61/bbl and $2.75/bbl respectively in Monday's trade. In the scope of the two days, it's a struggle to see what's changed in our view. Monday rallied on increased tensions between Israel and Hamas in Gaza, which is tough to argue with. Yesterday's trade fell on word of a truce. It's an area that doesn't produce much oil, and there's been no threat to supplies so far. Monday's rally was also helped by a 207 point gain in the Dow which was fueled by hopes for a settlement of the fiscal cliff. While those hopes are founded after Friday's joint statement by Congressional leaders, there were many fresh developments since Friday's 46 point gain in the Dow. The president is traveling in Asia and congress is on recess until November 26th. The Hill newspaper suggested yesterday that there is a disconnect between what's happening in Washington and the market's perception of what's happening. It suggested that the two sides are still far apart on the Bush tax rates and entitlement changes. The other issue we see as a potential negative is the speech by Fed Chairman Bernanke yesterday, where he said that the Fed would be able to do little in the event that the economy goes off the fiscal cliff.

Outside of developments in Washington, the oil market will still be focused on the growing divergence between current oil stocks and their five-year average. Last week's stocks level was 44.33 MB above the five-year average which was the highest since the w/e Oct 29th, 2010. At the same time, oil production is at the highest level since the w/e Apr 29th, 1994. Oil demand recovered last week due to the passing of issues associated with Hurricane Sandy, but that recovery may only last another week. The last monthly report from the EIA showed that global supply/demand balance expectations have tightened, but it was the result of less production rather than more demand.

Natural Gas

The gas market rallied sharply on Friday by advancing 8.7 cents. It lost 7.1 cents on Monday, but gained more than that back again in yesterday's 11.3 cent rally. The focus since Friday and even prior to Friday has been on a cooling pattern shown not only in the short-run forecasts but the longer-term ones as well. In its Oct 18th forecast, the Climate Prediction Center noted that the winter months of Dec-Jan-Feb would be above-normal in the western half of the country. Its Jan-Feb-Mar forecast showed warmth in the western and northern portions of the country as well. That forecast offered some degree of pressure on prices in the weeks that followed, as the market fell from $3.904 on Oct 18th to $3.608 on Nov 8th. The Nov 8th date is key, as it was then that NOAA dropped its watch for El Nino for the next four months, which helped create a short-tern low close one day later. The bullish tone that started on Nov 8th increased further after NOAA updated its long-range forecast on Thursday to show cooler temperatures in the northern and southeastern portions of the country with above-normal temps in a shrinking portion of the southwest. The October forecasts are shown below on the left, while Thursday's updated forecasts are shown on the right.

The near-term trading direction may continue to be bolstered by the colder weather. CWG issued a forecast yesterday for December that was colder than its previous outlook. Another focus will be today's inventory numbers, which we expect to show a decline of 24 bcf. The HDD numbers during the survey week were slightly higher than they were during the previous week when a draw of 18 bcf was reported. A decline today would further solidify the level two weeks ago as a record high. Inventories were reported at 3.929 tcf then, which was 77 bcf above the 2011 record high. That's a much smaller difference from what was suspected earlier this year. Support should also come from the shrinking contango, which implies that expectations for excess storage are diminishing. Dec futures may reach $3.95 over the next 1-2 weeks while Jan could touch $4.05.

Global Economic & Dollar News

» Chinese Premier Wen Jaibao said that the country's economy is becoming more stable and is expected to maintain relatively fast growth.

» Sec'y of State Clinton will visit Jerusalem, Ramallah, and Cairo amid the fighting in Gaza.

» Israel Postponed a decision on launching a ground invasion into the Gaza Strip.

» Egypt Brokered a cease-fire agreement between Israel and Hamas in Gaza.

» France's Credit Rating was downgraded from AAA to AA1 by Moody's.

» In Greek Debt, finance ministers moved closer to a deal that would release the next tranche of aid to Greece before end-Nov when it is expected to run out of cash. The size of a haircut is still being negotiated.

» The Hill newspaper raised the point Tuesday that the equity markets see something that's not being seen in Washington in terms of a deal on the fiscal cliff. It said that a deal is far from secured and that large differences remain over the Bush tax rates and entitlement changes. It said that lawmakers had no choice but to have the first meeting sound positive. It suggested that there's no guarantee that a deal is in the works and that it will happen by the end of the year.

» Fed Chmn Bernanke said that the fiscal cliff poses a substantial threat to the economy and will likely cause a recession if it hits in full force. Congress and the White House need to protect the economy from the effects of the fiscal cliff. He urged for the raising of the debt ceiling to avoid a catastrophic default. Said the economy continues to recovery although the pace is slow. He also said that the Fed would not be able to offer much help if the economy did go over the cliff.

» U.S. Housing Starts were +3.6% in Oct to 894K vs. 840K expected and 863K previously (revised down from 872K).

Energy News

» Motiva's Port Arthur Refinery will begin starting its crude unit and process some oil starting in early-Dec. It is expected to take about a month to go up to full rates. The new crude unit will give the facility capacity of 600,000 b/d.

Upcoming Energy Events

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

Wed - Natural Gas Inventories (11:00am EST)

Thu - Chinese HSBC Flash MFG PMI (Wed night at 8:45pm EST)

Thu-Fri - ECB Council Meeting

Fri - German IFO Business Climate

Sun - Spanish Election in Catalonia

Tue - API Inventories (4:30pm EST)

Wed - Last Trade NGZ2

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.

Natural gas inventories will be released today at 11:00 am EST due to Thursday's Thanksgiving holiday. The weather during the survey week seemed a bit colder than what was anticipated during the week, as the NOAA degree day estimates were between 134-142. That was 3-10 degree days above the previous week and could set up for a draw in gas inventories of 24 bcf compared to the previous week's 18 bcf decrease. Another decline this week will make the reading two weeks ago the new all-time peak in inventories at 3.929 tcf. That's a new record by only 77 bcf which isn't as much as was feared earlier this year when speculation about storage capacity constraints was ongoing. A decline in the magnitude of 24 bcf could be supportive for the gas market.

*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 Tuesday morning, 11/20/12

The overnight markets once again have lost the momentum as it seems the entire market place is watching the same movie. The beans are trading down 10-12, meal is down $3-4, oil has eased by 20 points, corn is down 2-3 and wheat is hovering around unchanged.

The market knows that the SA weather for the most part is good; the market knows that the bean yield exceeded everyone's expectations; the market knows that the basis is strong; the market knows funds are still long from much higher levels. So what is out there for influential news? The demand aspect seems to be questioned recently with speculation that China has cancelled bean purchases, there has been no confirmation of this but there has been re-negotiated contracts (don't we all wish we could do this with trading losses?) The CO figure seems to be rising for beans with some estimating figures closer to 175 than 140, but with domestic crush running so hard don't be too quick to change the CO figure. The corn is stuck in a range, at this point $7 it appears that the US will do more export business that is needed while at $775 it appears that we would lose the export markets. The bottom line to corn is that it is getting closer to exports and the threat for the corn CO at this point is to get smaller rather than larger.

The other factor that has been discussed is how bearish the new crop markets are, based on additional acreage along trend yield new crop CO are massive, beans are starting in the area of 400+ and corn would approach 2.0b. We realize that there are many factors to this but if this is correct the reality is the spreads most likely are not any good either even with a tight old crop balance sheet as every consumer will ration with the inverse and every farmer will sell every kernel into the inverse.

The outside markets are mixed with equities marginally higher, crude oil is down .17, natural gas is up .05, sugar is down .09, gold is down $2, $index is weaker, cotton is up .19, the DCE is lower in the beans and meal but higher in oil and corn, the Matif markets are lower in all markets and the MDEX finished +33 ringgits.

The OI in corn increased by 8882, wheat was up 3421, beans were down 2654, meal was down 1036 and oil was down 2326.

The option markets have once again worked themselves lower with downside CF puts down under 20%. The downside SN puts are under 19% as are the SX13 puts. These puts seem like better ownership for the bull with futures or the bear and under hedge them. The BO has shown that the market is attempting to make the big shorts liquidate and with this buying call spreads and selling puts could be something to look at as BO premium is still higher than beans. The wheat is much higher than corn and with the recent 50 cent move in CH-WH look to buy corn puts vs. wheat puts.

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