Energy Price Outlook
This week's trade in energies could see a mixed trend overall, but selling rallies may still be the most attractive trade at the moment. WTI will find key resistance at the 50-day moving average at $88.20 while strong support will be at the bottom of a bullish flag pattern at $86.20. A busy week is in store, as the weekend's Chinese economic and trade data will be digested on Monday. The EIA and IEA publish their monthly reports on Tuesday and Wednesday, while OPEC and the FOMC both meet on Wednesday. Oil prices may be pressured as OPEC is expected to leave production quotas unchanged, while the Fed should react to slow economic growth by maintaining an accommodative posture. Additional pressure should come from the lack of progress in the fiscal cliff talks, building levels of gasoline stocks, increasing domestic oil production, and relatively weak oil demand. Bullish issues regarding tensions in the Middle East appear to be simmering down, so it's difficult to find the upside in energies except for maybe the weaker dollar and/or the higher stock market. We'd favor selling rallies around the $88.00-$88.50 range this week.
Oil futures saw small losses as they approached the payroll number on Friday morning but rebounded around 80c/bbl immediately after the number. The rally in oil prices didn't last long and the market began trending lower within 10 minutes of its release. Payrolls were +146K vs. +85K expected, but there wasn't any impact from superstorm Sandy, which was reflected in the reduced consensus expectations. Weekly hours worked were unchanged. The unemployment rate fell to 7.7% from 7.9% but it was due to 350K workers leaving the labor force. Additionally, retail jobs gained 53K potentially due to the earlier than normal Thanksgiving which may not have been accounted for in the seasonal adjustment factors. The specter of dampening influences on next month's number helped push energy prices back to the downside as the day progressed. Strength in the dollar also lent pressure to energy markets after Germany's Bundesbank downgraded GDP forecasts.
This week's trade will again focus on the fiscal cliff and the current situation of high inventory levels of both oil and oil products. Friday morning brought some hope on the cliff negotiations, as it was reported that Speaker Boehner and Pres Obama were negotiating one on one now. The interpretation was that a sense of urgency had entered, and of course earlier last week, a soft deadline of Dec 15th and a hard deadline of Dec 21st were floated. The truth is hard to discover, however, as both Treasury's Geithner and CEA's Krueger said that the president is okay with going over the cliff if he doesn't get higher taxes on the wealthy. There are two backstop plans developing on the House republican side. One is the "doomsday" plan where tax cuts for those below $250K would be extended and nothing else if there is no agreement by Dec 31st. The other is the "boomerang" plan where some of the Bush tax rates would be extended sometime after the start of 2013. Our expectation is that these options will become real possibilities, as it's unlikely that any deal will be struck before Christmas.
High inventories of oil are another problem for this market in general, which we discussed on Friday. Inventories in OECD countries are 996.50 mln bbls as of 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. U.S. stocks of oil are also at high levels and currently 41.0 MB above the five-year average. 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.
January futures fell 11.5 cents on Friday, amid concern that weather may remain above-normal in key heating consumption regions. The area of above-normal temperatures that shrunk in Thursday's NOAA 8-14 day forecast ended up expanding on Friday more westward than was shown previously. Temperatures in the TX-OK-KS regions warmed by about five degrees as well in Friday's update. There's also concern that the warm weather experienced last week will translate into a smaller withdrawal in Thursday's inventory update than the 113 bcf that's shown in the five-year average. The futures price curve moved further into contango on Friday as a result of the weather, and the Jan-Jun spread fell by 2.9 cents.
Some pressure may also have come from a Bloomberg Government study published midday, which said that compressed natural gas vehicles probably won't significantly decrease U.S. oil demand for decades. It said that if CNG vehicles reached the optimistic figure of 5% of new car sales by 2025, it would only reduce gasoline demand by about 1.5%. In our view, a large portion of the hopes for demand growth over the past summer have stemmed from potentially higher sales of natural gas vehicles.
In Friday's research, we discussed the risk of a decline into the $3.50-$3.60 range and favored buying the midpoint at $3.55. Unless Wednesday's low at $3.507 is removed as support this week, that should still be a favorable trade. Technical support will 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. Friday's trade closed marginally below some of those levels, but it did the same on Tuesday before a strong rally on Wednesday. Wednesday's low at $3.507 should prove to the be the most important of the support levels.
Global Economic & Dollar News
» A 7.3 Magnitude Earthquake struck Japan and was felt in Tokyo. The earthquake occurred in the same place as the 9.0 magnitude event that struck in March 2011. The assessed impact was reported as being minimal.
» German Industrial Production was -2.6% vs. unchanged expected and vs. -1.3% previously. » The Bundesbank cut Germany's 2013 growth forecast to +0.4% from +1.6% previously. It cut the 2012 forecast to +0.7% from +1.0%.
» Greece's Debt Buyback may succeed, according to WSJ, which said that the country may be successful in cuting its debt stock by as much as €20B.
» Non-Farm Payrolls were +146K vs. +85K expected. There were 49K in downward revisions. The BLS said that superstorm Sandy did not impact payrolls. Retail jobs were +53K possibly due to holiday hiring amid the early Thanksgiving. The unemployment rate fell to 7.7% from 7.9% and vs. 7.9% expected. The unemployment rate fell after 350K left the labor force. The U6 rate of underemployment was 14.4% vs. 14.6% previously.
» With Regards to Sandy, the BLS said that the storm struck on Oct 29th while the payroll survey period ended on Nov 12th. They said that workers have to be off for the entire pay period in order to be counted as unemployed. Additionally, they are counted as employed regardless of whether they were paid for the full month.
» University of Michigan Preliminary Sentiment was 74.5 in Dec vs. 82.0 expected and 82.7 previously.
» House Speaker Boehner said that the president is attempting to walk right up to the fiscal cliff deadline. Said that the president has wasted another week.
» Saudi Arabia's Naimi said that oil prices are fine and the markets are well supplied.
» BFOE North Sea Exports will drop to 870,968 b/d in Jan vs. 872,581 b/d in Dec, according to loading programs.
» Oil Rig Counts fell 4 last week, according to Baker Hughes. Gas rigs fell 7 while horizontals were -7.
Upcoming Energy Events
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)
EIA Inventory Preview
The EIA is expected to report a decline in oil inventories of 3.0 MB this week. Going into year-end, refiners appear to be more willing to reduce inventories than we had expected last week. There's an issue typically, whereby holders of inventory usually want higher priced oil that's been added late in the year off the books in order to show that costs are being held. Given that prices have been trending lower throughout most of this year, we had expected little incentive to liquidate inventories. Utilization gained 2.0% last week to reach the highest level since late-Aug and ran counter to typical trends. It's currently 4.6% above the five-year average compared to 2.1% above it at a low point just one month ago. That suggests that refiners are in fact interested in reducing oil stocks into the end of the year. Imports are always difficult to predict, however, they do trend lower through year-end and may also pressure inventories. Another key metric in this week's data will be the level of demand, as it has fallen 1.1 mb/d in the last two weeks. A lack of demand could help to elevate inventories, as refiners have little incentive to produce product. Indeed, WTI refinery margins are near their lowest of the last 9 months at $27/bbl while Brent margins are around the $6/bbl level. Product stocks gained sharply last week and could see significant increases again this week due to high utilization. Gasoline could increase 4.0 MB while distillates may rise 2.0 MB.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures
Published Friday morning, 12/7/12
The overnight markets are all over the place, most recently collapsing from 7-8CST with beans trading down more than double digits. The meal has quickly lost $3-4, oil remains 20-30 points lower, corn is melting trading down 5-6 and wheat has drifted lower trading down 4-5 cents.
Ok what has changed over the past few weeks? The Chinese crush margins have rebounded back to levels that are now profitable and allowing them to purchase beans again, did the market really think that they were gone for good? The SA weather problem is not a problem and as of right now crops will be huge; maybe not the massive figures that were discussed a month ago but when reductions are only in the hundreds of thousands of tons rather than millions of tons it will still give the world ample supply within the next 3 months. The corn export demand that was thought to have returned to the US by now has not and with every passing day the SA new crop is one day closer, at this point the export figure for US corn will continue to fall and place directly to the CO figure. The bean balance sheet is tight but as we have seen in the past once SA new crop is available we can expect to see a large switch of sales out of US to SA.
The weather in SA is improving in Argentina where is appears to be finally drying out and allowing for additional field work to be done, the corn acres are lost but seems as if beans will not change much.
The basis levels are the one thing that many will attempt to contend as the bullish factor for all markets, yes the basis levels are extremely high for this time of year with beans trading +115...that calculates out to $16 beans. The corn basis is also lofty as it trades in the mid +80's given these basis levels along with the big inversions of future spreads the market should see significant farmer selling from both the US and SA on further rallies. The outside markets are mixed with equities trading higher, crude oil is up .45, natural gas is down .05, sugar is down .16, gold is down $11, 4index is stronger, cotton is down .37, the DCE is higher in all markets, the MDEX finished up 3 ringgits and as of 8CST the Matif markets were still higher.
The OI in corn increased by 3561, wheat was up 1505, beans are down 3791, meal is up 3107 and oil fell by 4505.
The USDA will release the monthly S&D figures next Tuesday, typically the December report does not have a significant impact and looking at various projections there shouldn't be much of a change, but let us remember that anything is possible and given what these reports have looked like in the past don't be caught flat footed.
The January options have 2 weeks left and with the report next Tuesday these could be a very low cost insurance policy for the report. The CF 720 puts are 2.5 cents, The SMF 440 puts are $3 which look like much better value than SF given the fact that January crush is trading at 63 cents. The WF is 19% owning these options, if even for just 3 days won't break the bank. We have mentioned in the past that the big inverses in futures spreads will most likely collapse at some point so trying to find various plays to capture this still looks attractive, such as buying CN 7 puts vs. selling CZ 6-5 put spread, Buy 2 SN 1460 puts vs. selling 1 SX straddle are just a few.