Energy Price Outlook
The oil market is a tough call today and could potentially rebound amid channel line support and today's non-farm payroll report. The channel offers support at $86.10/bbl in WTI, while we think that the payroll report could be spun favorably even if it misses estimates due to superstorm Sandy. Other factors are still pointing to the downside, but suggest that the best trade in the near-term is selling rallies in oil. Pressure will come from the increasing intransigence shown in the fiscal cliff negotiations, yesterday's ECB downgrade of its growth forecast, elevated U.S. oil production and weakness in demand, the likelihood that OPEC leaves production unchanged next Wednesday, and from Monday's bearish reversal pattern on the candlestick chart. We review the excess inventory situation in the Analysis section below. We would change our short-term bias from negative to neutral for a day or two, and attempt to enter new shorts at around the $88.00-$88.50 range.
WTI finished $1.62/bbl lower yesterday while Brent fell $1.78/bbl. The markets were pressured by the ECB's reduction in its 2012 and 2013 growth forecasts and by a hint of disarray in Italy, where the prime minister's party walked out of the Senate ahead of a confidence vote on economic measures. The midpoint of the ECB's 2013 growth forecast was revised down to -0.3% from +0.5% previously. Pressure also came from a sense that the inflexibility on the fiscal cliff talks had increased overnight. The Obama administration wants full control over the debt ceiling now in order to avoid another confrontation on spending cuts 2-3 months from now. Such a move would be unconstitutional, but is illustrative of the brinksmanship that's taking place in Washington now. Some lawmakers are even suggesting that a brief move over the cliff may be the best way to force a compromise.
Today's trade will focus on the jobs report and on the technical situation in crude oil. The payroll number is expected to show an increase of 85K jobs today compared to 171K last month. Even if the number falls short of the 85K consensus, it's possible that the number is dismissed as having been affected by superstorm Sandy. After the ADP reported an increase of 118K jobs on Wednesday, the organization said that the number was reduced by 86K due to the storm. A small positive focus for oil prices may also come from the short-term technical situation, where yesterday's trade held at the bottom of a rising channel pattern drawn over the last four weeks' trade (chart above). The pattern could become a bearish flag pattern eventually, and is thus bearish for the longer-term trend. However, a small bounce is possible today after three consecutive days of weakness. The 50-day MA at $88.35 will offer key resistance.
January futures lost 4.1 cents in yesterday's trade in a somewhat volatile session. Above-normal temperatures were the focus, as Earthsat suggested as much over the next five days. The Inventory report showed a draw of 73 bcf, which compared to consensus of -65 bcf, but the rally that it produced was short-lived. The midday weather update was a bit warmer than the previous government update, but we're concerned about the 8-14 day map below, which shows a growing area of below-normal temps in the U.S. northwest.
Yesterday's selloff may be more of a short-term correction or profit-taking event following Wednesday's 16.1 cent advance. The technical situation is still relatively favorable in our view, and suggests that the market will be supported between the $3.50-$3.60 range for a rally toward the $3.80 level. Our $3.75 objective was approached by 0.2 cents and essentially reached yesterday, which implies now that the best strategy may be to buy breaks near the midpoint of the support range at $3.55 with an objective at $3.80. Technical support will continue to be offered by a bullish divergence on the daily stochastics between the early-Nov and early-Dec lows, the 200-day MA in NGF at $3.52, the bottom of a bullish flag continuation pattern at $3.57, and from the 50-day MA on the continuation chart at $3.59.
Global Economic & Dollar News
» The ECB left rates unchanged. ECB's Draghi said that he sees a gradual recovery taking place in 2013, although weak growth will extend into early 2013 before recovering.
» The ECB reduced its 2012 GDP forecast to -0.5% from -0.4% forecasted in September. Its 2013 forecast was cut to -0.3% from +0.5% previously.
» German MFG Orders were +3.9% vs. +1.0% expected.
» Italian PM Berlusconi's PDL Party walked out of the Senate ahead of a confidence vote on economic measures yesterday.
» Initial Claims were -25K to 370K vs. 380K expected. Continuing claims were 3.205M vs. 3.305M previously (revised up from 3.287M). The Labor Department said that there were no effects from superstorm Sandy in the data.
» Natural Gas Inventories were -73 bcf vs. -65 bcf expected. Inventories are 168 bcf (4.62%) above the five-year average vs. 190 bcf (5.15%) above it last week.
Upcoming Energy Events
Fri - U.S. Non-Farm Payrolls (Consensus +85K, 7.9%)
Sat - Chinese CPI, Industrial Production, and Retail Sales
Sun-Mon - Chinese Import Data
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
Thu - Natural Gas Inventories (10:30am EST)
Wednesday's weekly update on inventories by the EIA showed a drop in oil stocks of 2.4 MB and an increase in gasoline and distillate supplies of 7.9 MB and 3.0 MB respectively. The combined result of the three data points was a gain of 8.53 MB. Part of the shift from crude oil inventories to products represented the desire of refiners to liquidate oil stocks at year-end, while the 8.53 MB build in combined stocks showed that the oil market in general is well-supplied.
The latest data published by the International Energy Agency showed that OECD oil stocks were 996.50 mln bbls in Sep and up from 934.80 mln bbls a year earlier. Total OECD stocks of oil and products were 2,745.50 mln bbls in Sep and compared to 2,683.30 mln bbls a year ago.
The IEA's data confirm what the U.S.-based EIA has published and shows that inventories are near the high-end of recent history at the moment and may keep a cap on oil prices. The following chart shows the EIA's OECD inventory series as a function of OECD demand to illustrate the number of days that inventories are available for consumption. They've averaged 59.2 days of supply since April of this year, and are slightly above the average since 2009 of 59.0. They're considerably above the 52-54 days that were prevalent from 2006-2009 when oil prices embarked on their rally toward $147/bbl. The high level of days coverage as well as outright oil stocks suggests that there is an excess of supply at the moment, which could cause the oil market to have difficulty gaining any kind of bullish momentum in the near-term. Given that U.S. production may continue to grow and OPEC could maintain its quota in next Wednesday's meeting, we think the excess supply will prevent oil prices from gaining any kind of upside momentum.
Natural Gas Commentary
Published Thursday afternoon, 12/6/12
Natural Gas traded lower settling $3.666, down $0.034 (0.9%). The curve was weaker, 13/16 down $0.03. Hub cash was weaker, ~$0.20 back this morning, Z-6 down $0.40 to $3.90 as temps are running 10-15 above normal in major Northeast/Midwestern cities through Monday. The 12z runs were mixed, the operational was significantly warmer overall, particularly the 11-15 day as troughing over the Eastern U.S. wasn't as strong. The ensemble and European models were generally more in line with overnight models, showing much of the nation turning cooler, particulary West to Central U.S. toward the middle of next week. The EIA reported a withdrawal of 73 Bcf, slightly higher than market expectations and bullish against last year's 20 Bcf withdrawal and 5-yr average 39 Bcf withdrawal. YoY we now stand at a 27 Bcf deficit and the surplus against the 5-yr average tightens to 150 Bcf. Next Thursday we anticipate a withdrawal from storage btwn 0-5 Bcf, bearish vs last year's 102 Bcf withdrawal and 5-yr average 94 Bcf withdrawal.
Vol was offered through G13 and little changed beyond: (F13 365 25.00 27.00 37.24% -0.45% G13 370 40.50 42.50 36.59% -0.23% H13 365 49.00 51.00 36.29% 0.10% J13 365 54.00 56.00 34.48% 0.40% K13 370 59.00 61.00 32.83% 0.15% M13 375 64.00 66.00 31.64% 0.15% N13 380 69.00 71.00 31.23% 0.19% Q13 380 73.50 75.50 30.98% 0.37% U13 380 79.00 81.00 31.23% 0.27% V13 385 84.50 86.50 31.30% 0.09% X13 395 86.00 88.00 29.46% 0.08% Z13 415 89.00 91.00 27.85% 0.04%). Technically we are bearish but the market is oversold, we look for support $3.50 to hold. Resistance is found at $3.70, $3.82, $3.93. On the downside we see support at $3.58, $3.50, $3.43, $3.36.