Energy Price Outlook
Oil prices may continue their decline in the near-term, as pressure comes mainly from technical factors and uncertainty regarding the fiscal cliff negotiations. The ADP payrolls were less than expected yesterday, which sets up for a disappointing payroll number on Friday. However, many discounted the ADP due to Superstorm Sandy, which may reduce the influence of Friday's payrolls as a result. Background pressure will be offered by elevated U.S. oil production, building inventories of gasoline, weak demand for products, and the likelihood that next Wednesday's OPEC meeting leaves production unchanged. Support from yesterday's strength in the stock market and/or events in Egypt failed to gain much traction in the oil trade yesterday. We would look for the downward trend to continue and for WTI to fall toward the $85.00/bbl level until a fix to the fiscal cliff is negotiated.
WTI finished 62 cents lower yesterday while Brent settled -$1.03. The majority of the weakness was seen in the few hours before and the few minutes following the inventory numbers. Pressure before the numbers came potentially from Tuesday afternoon's API data which showed a potential for an elevated gasoline inventory number. The EIA confirmed that yesterday when 7.9 MB were added. The number was also negative because total oil demand fell 632 kb/d to 18.3 mb/d and moved closer to the lower end of the two-year range of 17.6 mb/d-20.3 mb/d. Oil stocks dropped 2.4 MB, however the 2.0% increase in refinery utilization at this late-stage of the year suggests that refiners are whittling down inventories as part of year-end strategies. A shift by refiners from oil stocks to product stocks is practically a zero-sum game and offers little insight into the condition of the oil market. The stock market gained yesterday in the wake of a speech by Pres Obama which suggested that a deal could be reached on the fiscal cliff, but it wasn't enough to create much strength in energies.
Oil production fell 1 kb/d last week in the weekly inventory report, but it remains at high levels. An annual report from the EIA yesterday suggested that U.S. production would reach 7.5 mb/d by 2019 from 5.65 mb/d last year. The growth in oil production is generally coming from shale areas such as Eagle Ford in Texas and the Bakken in North Dakota. Plains All American yesterday said it agreed to acquire crude oil rail terminals in the two areas with loading capacity of 85 kb/d. It also will acquire an offloading terminal in St. James Louisiana with unloading capacity of 140 kb/d. The investment in rail and rail terminals in recent years shows that companies are preparing both for the boom in oil production as well as the possibility that the Keystone XL pipeline doesn't get approved by Pres Obama.
We would look for prices to continue to trade poorly in the near-term. Technicals should remain an influence, as Monday's trade created a bearish shooting star reversal pattern on the candlestick chart after testing and holding at the Nov 19th high at $89.80 on a closing basis. The 50-day moving average was also held on Monday with only a small break. Brent futures have been holding below its 50-day MA for the last several weeks as shown in the chart on page 1.
January futures finished 16.1 cents higher in yesterday's trade and unwound the 5.2 cent decline in Tuesday's trade. The factors behind the rally were difficult to discover, as it seemed that favorable technicals played a role as well as expectations for today's number to show a decline of 65-71 bcf according to newswires. The five-year average usually falls 51 bcf this week, but it seemed that some of the expectations for a sharp decline were already surfacing prior to Tuesday's 5.2 cent selloff. It's difficult to find the surprise in the consensus as a result. The EOXLive estimate for today's inventories is also -65 bcf.
The market may continue to bounce in the near-term, as technicals and relatively low prices are enough to oppose indications of above-normal temperatures in the eastern portion of the country. They may also be enough in the short-term to oppose growing production, which the EIA said in its annual report yesterday would be enough to make the U.S. a net exporter of gas by 2020. Technicals are led by this week's hold at the 200-day MA in NGF3 at $3.52, the bottom of a bullish flag continuation pattern at $3.54, and from the bottom of a bullish flag continuation pattern at $3.57. Yesterday's rebound also helped confirm a bullish divergence on the daily stochastics between the early-Nov and early-Dec lows. Finally, a bullish seasonal pattern is in place between Dec 3rd and Dec 20th, which could bring the market higher as well. We'd look for prices to firm toward the $3.75 level in the near-term.
Global Economic & Dollar News
» Chinese HSBC Services PMI fell to 52.1 in Nov from 53.5 previously.
» China's Communist Party Chief Xi Jingping talked about expanding domestic demand and said he supports urbanization. The comments were suggestions that the government will support additional stimulus measures.
» China's Regulators abolished a rule that limited insurers' investments in commercial banks. The Shanghai Composite advanced 2.87%.
» Eurozone Services PMI was revised up to 46.7 from 45.7 in the flash report and 46.0 in October.
» U.S. ADP Payrolls were +118K in Nov vs. +125K expected and +157K previously. The number was pressed by 86,000 jobs due to Superstorm Sandy according to the report.
» Citigroup will cut over 11,000 jobs and take a pre-tax charge of $1B in Q4.
» ISM Non-MFG PMI was 54.7 in Nov vs. 53.5 expected and 54.2 previously.
» Plains All American said that it agreed to acquire crude oil rail terminals from U.S. Development Group for $500M. The terminals are located in Texas, North Dakota, and Colorado and have combined loading capacity of 85 kb/d. An unloading terminal in St. James LA will have unloading capacity of 140 kb/d.
» Freeport Mcmoran will buy Plains Exploration and Mcmoran Exploration for $20B.
» Phillips 66's Bayway NJ Refinery lost power overnight Wednesday to a crude unit and a catalytic cracker unit. It was returned to normal operations by the middle of the day.
» The EIA released its Annual Energy Outlook yesterday and said that the U.S. will be a net exporter of natural gas by 2020. Exports could increase the price of gas by $1.11/mmbtu in five years. It also said that U.S. oil production will increase to 7.5 mln bbls per day in 2019 from 5.65 mln in 2011. The EIA switched its crude oil price benchmark to Brent from WTI in its forecasts.
Upcoming Energy Events
Thu - Natural Gas Inventories (10:30am EST)
Fri - U.S. Non-Farm Payrolls
Tue - EIA's Short-Term Outlook
Tue - API Inventories (4:30pm EST)
Wed - IEA's Monthly Report
Wed - OPEC Meeting
Wed - EIA Weekly Oil Inventories (10:30am EST)
Wed - FOMC Meeting and Press Conference
EIA Inventory Review
The EIA reported oil stocks yesterday that exceeded the expected decline and were slightly positive for prices. However, oil prices weakened slightly after being countered by greater-than-expected builds in gasoline and distillate stocks. The gasoline market led the charge lower by falling by around 2.0 cents initially and around 4.0 cents from the levels that prevailed prior to the numbers' release. The two biggest points in the data yesterday were that refinery inputs increased for the fourth consecutive week while total oil demand languished at relatively low levels. The data suggest that prices may continue to weaken over the coming weak, with the potential exception of heating oil which still has tight stock levels. 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 -2.4 MB vs. -0.5 MB expected. The drop was mainly the result of increased refinery utilization which gained 2.0% and took an additional 340 kb/d in oil for processing. Utilization has gained 5.2% in the last four weeks, or an additional 892 kb/d, as refineries have either returned from scheduled maintenance or have recovered from Superstorm Sandy. Total oil demand fell 632 kb/d to 18.3 mb/d and moved closer to the lower end of the two-year range of 17.6 mb/d-20.3 mb/d. Demand has firmed relative to the five-year average over the last few months but still remains pathetic compared to recent years. Demand for industrial oils fell the sharpest by losing 578 kb/d after gaining 730 kb/d last week. The level of oil stocks is now 41.04 MB above the five-year average compared to 40.46 MB the week before. There's a chance that refineries are ramping up into year end in order to reduce inventories, but that could be taken as a false indication of a tightening market. Distillate inventories are still more than 30 MB below their five-year average, which indicates higher production may simply be a balancing game. Domestic oil production fell 1 kb/d in the first decline since Hurricane Isaac in late-Aug.
A rise in gasoline stocks of 7.9 MB compared to consensus expectations of +1.6 MB. The increase was the result of higher refinery output, which added 468 kb/d on the week. Despite the large 5.2% increase in refinery utilization over the past four weeks, output of gasoline has gained only 305 kb/d. It's difficult to tell where the extra production has gone, as exports of all products have been steady for four weeks, according to the EIA. Gasoline stocks are now 3.14 MB above the five-year average compared to 1.98 MB above it last week.
Distillate inventories were +3.0 MB vs. +1.0 MB expected. The increase was also the result of higher production, which gained 286 kb/d on the week. Similar to gasoline, production is up only 287 kb/d in the past four weeks despite the 5.2% increase in utilization. Distillate demand fell 293 kb/d on the week, while imports were down 33 kb/d. Distillate stocks are now 30.10 MB below the five-year average compared to 31.93 MB below it last week.
Published Wednesday morning, 12/5/12
The overnight market have once again shown some signs of life in the soy-complex as this market seems to be the only market that has global interest. The beans as of 8CST are trading +6-9, meal gained $1.50-2, oil increased by 25-30 points, corn is virtually unchanged...again and wheat is up 2-3.
The corn market continues to be plagued by a lack of fresh news along with the mentality that on a break the export channel could actually gain some interest yet a rally would completely dismiss the chances of the US doing any export business...the bottom line to this is that ADM has been dead right selling these strangles over the past few months and unfortunately the future doesn't look much different than the past. Saying all of this, the market is still priced at $7.50 and the future spreads still have a big inverse which means at some point something needs to change. The basis levels at this point remain very strong which will at some point draw farmers to sell unsold product and also create the consumer to move needs out forward, this will most likely take place shortly after the first of the year and once the market is comfortable that SA will have a bumper crop.
The bean market on the other hand is doing business, China has been inquiring for beans each and every night for the past week as internal crush margins are back on the positive side. The basis levels that are trading are near +$1.20 at the gulf, unheard of levels for this time of year. The meal demand remains robust as well and with the US returning to the export markets in bean oil expect there to be a battle from the domestic crusher vs. the exporter for the next few months for beans.
The weather in SA continues to be mostly benign, Argentina is wet, nothing is new with this, and they have lost corn acres and will not be planted to beans. Brazil at this point is mostly very good and production figures remain at record levels, remember every day that passes and there is not a problem is a day closer to new crop and an abundance of product.
The outside are not doing much with crude oil down .33, equities are higher, natural gas is up .02, RBOB is up .27, gold is down $6, $index is higher, cotton is up .06, DCE is higher in all markets, the Matif is higher in all markets and the MDEX finished down .10 inggits.
The corn OI dropped by another 11740, wheat was down 4645, beans increased by 2284, meal was down 445 and oil increased by 776.
The option markets are very cheap in the nearby contracts in virtually every market, yet they have been cheap for the past month and only have become cheaper. The deferred corn options are at a significant premium to the nearby which still seems to be a missprice but yet this also has been this way for weeks now. The bean puts seem like value vs. calls, this too has been the way for weeks, bean oil is still higher than corn, this has not stayed like this in over a decade, nearby wheat premiums are sub 20%.
The world of volatility seems to have changed in nearly every arena as all volatility levels are trading much lower than what has traded over the past 5-7 years. It's from corn to natural gas to crude oil options and with overall market participants being reduced and the banking community not being nearly as active and providing liquidity like years past it could be that the paradigm has indeed shifted to a global environment that is much less volatile.