Energy Price Outlook
Oil prices are likely to hold within their relatively sideways direction in the near-term, as support from a weaker dollar is countered by uncertainty over the fiscal cliff. WTI had a nice bounce early in the session yesterday but fell back to close near the day's low. Today's trade will continue its focus on negative factors such as the lack of progress in fiscal cliff negotiations, recent signs of weakening economic data, and the potential that oil inventories remain elevated compared to their five-year average. The upside will focus mainly on the inability of WTI to break below the two-month consolidation bottom at $84.05, the potential of the Chinese economy to recover, and on the debt deal struck with Greece last week.
WTI settled 18c/bbl higher yesterday while Brent finished 31 cents lower. The market gained support early in the session due to the marginal recovery in the two Chinese PMI figures over the weekend. Support was also applied by weakness in the dollar caused by follow-through from last week's debt deal with Greece. Oil prices fell around mid-morning in the wake of the ISM manufacturing PMI number, which fell to 49.5 from 51.7, with weakness caused by preparations for the fiscal cliff. The employment component fell to 48.4 from 52.1 which suggests that Friday's employment report could show a contraction in manufacturing jobs. WTI peaked at $90.33 before turning lower yesterday and held at the previous high made on Nov 19th at $89.80 on a closing basis.
The effects of the fiscal cliff are still evident in the oil market as well as other risk assets. It's likely that in true Washington style, the White House and Congress will delay a decision in order to show their constituents that they're fighting for them. It's frustrating for the markets because the negative effect that the uncertainty is offering could have all been avoided if there was action taken earlier in the year. Artificial pressure is thus forced onto the market, which in the current instance is being countered by weakness in the dollar.
European finance ministers eased the terms on emergency aid for Greece last week by cutting the rates on bailout loans, suspending interest payments for a decade, and giving Greece more time to engineer a bond buyback. The action has been positive for the euro and thus negative for the dollar, which is mainly an inverse gauge of the euro due to its composition. The two-way tug of war may continue in the near-term, as support from dollar weakness will be countered by the adverse consequences on the economy from the fiscal cliff.
January gas futures settled 3.0 cents higher yesterday, as the focus turned to cold weather once again. CWG said that normal temperatures could be seen in the Northeast and Midwest from Dec 13th-17th. The focus on colder temperatures ran counter to events last week which began discounting the 60 and 70 degree temperatures being seen in the Midwest currently.
A secondary focus was likely given to technical factors, which sees key support between $3.52 and $3.57. The 200-day MA offers support in NGF3 at $3.52, the 50-day MA on the continuation chart is at $3.54, and the bottom of a bullish flag continuation pattern currently sits at $3.57. These three levels are backed up by a developing bullish divergence on the daily stochastics (chart below), and by a favorable seasonal pattern that began with yesterday's close. Between Dec 3rd and Dec 20th, the market has gained 5.3% on average, although only 11 of the last 20 years saw rallies. In years where the injection season ended before Nov 9th as it did this year, the average increase is 11.0%. Prices advanced in 3 of those 4 years.
Prices are expected to bounce in the next few days, with technicals leading the way. Key resistance levels will be at $3.60 from the Nov 12th low and at $3.78 from the low on Nov 16th and we believe that prices may reach the latter level within a week or two. The biggest worry we have is the weather, which is still signaled by NOAA's 6-10 day and 8-14 day forecasts as being above-normal in most of the country except for the northern tier. The degree day numbers from last week suggest a draw of 65 bcf in our view, which would be more than the 51 bcf withdrawal shown by the 5-year average. However, given the high temps in the Midwest currently, along with last week's surprising build of 4 bcf, we don't necessarily believe that Thursday's number will be very bullish.
Global Economic & Dollar News
» China's Nov MFG PMI was 50.6 vs. 50.8 expected and 50.2 previously.
» China's Nov Non-MFG PMI was 55.6 vs. 55.5 previously.
» The U.S. Fiscal Cliff Talks didn't produce anything positive over the weekend. House Speaker Boehner criticized Treasury Geithner's proposal as being not serious and said that negotiations have gotten almost nowhere. Congressional staffers said that things don't appear favorable behind the scenes just as they don't in public.
» ISM MFG PMI was 49.5 in Nov vs. 51.4 expected and 51.7 previously. New orders were 50.3 vs. 54.2 previously while employment was 48.4 vs. 52.1. The group said the decline was partly the result of companies reducing activity before the fiscal cliff.
» Morgan Stanley said oil prices are likely to fall through the end of the year before possible gains next year.
Upcoming Energy Events
Tue - API Inventories (4:30pm EST)
Wed - ADP Payrolls
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - Natural Gas Inventories (10:30am EST)
Fri - U.S. Non-Farm Payrolls
Dec 12th - OPEC Meeting
Dec 12th - FOMC Meeting and Press Conference
EIA Inventory Preview
The EIA may report a drop in oil inventories this week as the five-year average suggests, however, it should be much smaller than the 2.9 MB average decline. EOX anticipates a drop of 0.5 MB this week, as this year's trend in December should be somewhat counter to that which is typical. Issues related to LIFO accounting typically cause refiners to reduce inventories late in the year when prices advance as the year progresses. Inventories typically fall 13.5 MB between the w/e Nov 30th and Dec 28th, according to the five-year average. Rising prices haven't been an issue this year, and may help keep inventories elevated as a result. Rising domestic oil production is another factor that's likely to keep inventories buoyed this week, as output has increased 1.33 mb/d in the 12 weeks since the 772 kb/d drop caused by Hurricane Isaac. Imports have trended near the low-end of the recent range, but there's little incentive for refiners to increase them, with stocks currently more than 40 MB above the five-year average and refinery margins low.
Refinery utilization usually surges this week before reaching a small peak and declining through year-end. Given low profit margins, however, we don't anticipate a very large increase. It's safe to say that gasoline will build this week, but distillates have still been slow to increase. Gasoline demand is usually steady at low levels at this time of year, while distillate demand usually increases starting this week. We anticipate gains of 2.0 MB and 0.5 MB respectively.
Natural gas stocks may fall 65 bcf according to our estimate, as heating degree days were a fairly high 160-165 according to NOAA. Such a reading would cause our model to predict a draw of 85-90 bcf, however, it has underestimated increases in production for most of this year. Our estimate of 65 bcf is more than the five-year average would suggest is typical for this week, but we don't necessarily expect a bullish market reaction on Thursday. A quick look at temperatures in Chicago showed them 1.07 degrees above normal during the survey week, which may reduce heat demand. We're also wary about expecting a bullish number after last week's 4 bcf increase.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures
Published Monday morning, 12/3/12
The overnight trade is starting the month of December with renewed hopes that December of 2012 will give a Christmas present like the December of 2011. The beans are already +20, meal has gained $5, oil has posted gains of 70 points, corn is pushing 10 higher and wheat is also +10-12.
The weekend finally saw some wheat business that will be done out of the US as Egypt purchased 230.0mt of US wheat for LH Jan FH Feb, what is interesting about this is that given the time frame for shipment there very easily could be additional wheat business heading to the US shores. We would also point out that the US is nearly 600.0mt behind what the USDA is projecting. The USDA will issue S&D figures on Tuesday the 11th and what everyone is expecting is to see a modest increase in the overall bean CO, wheat CO while the corn CO is projected to be virtually unchanged.
The month of November PMI figure out of China also lends to some early support with it coming in at 50.6 vs. 50.2 last month; this is a 7 month high. This also seem to have lent to the $index being weaker which is assisting in nearly all commodity markets. The Crude oil is back over $90, natural gas is up .02, sugar is up .36, cotton is up .19, gold is up $6, RBOB is up 2.90, the DCE closed higher in all markets, the Matif markets are all higher while the MDEX finished lower.
The OI in corn fell by 8089, wheat was down 9222, beans increased by 3331, meal was up 5991 and oil increased by 4634.
The SA weather could give both the bulls and the bears something to discuss, there is no doubt that Argentina is too wet and 1-1.5m corn acres have been lost and the forecast remains wet, these acres will not go to beans but rather go idol. Brazil for the most part is doing very well and record production should still be achieved given today's forecast.
The basis levels at the Gulf are on fire in the beans where the best offer going home on Friday was +$1.20F, do the math and that puts cash beans at nearly $15.60. The corn basis is also improving as it traded into the upper +.80's on Friday. The bean oil markets in SA are improving as well which is pushing additional business into the US where we already have the entire sales for the calendar year on the books.
The January options have 3 trading weeks left or 18 calendar days and from what we have seen in the 1st 12 hours of trading for the week these January options still could have some life left in them. The SF along with the CF are hovering around the 18% level, both off the lows of 17% last week but from a $ cost are still very inexpensive with so much time left. The CG could also be something to monitor as they are now under 20% and with the critical January report that will be released on January 11th these options could have tremendous value, we would point out that over the past 4 months ADM has aggressively sold the nearby corn option premium...at any level, they have not sold any CG yet so be somewhat cautious with this. The gamma vs. Vega remains something to monitor in corn as the deferred are still significantly higher than the nearby. The BO has eased off over the course of last week and is now getting to parity with beans, for those who think the massive fund short will be chased out by years end the BOF calls on a $ value won't hurt than badly. The meal remains at a premium to the beans and oil, possibly look at 1x2 call spread and even possibly sell some puts against it with futures for the bears or under hedge it for the bulls. The wheat premium are inching higher and are pushing back into the mid 20's with corn so much at a discount there could be some interesting corn/wheat plays to look at such as buying the CG 8 call vs. selling WG 950 call for near even $.