Energy Price Outlook
Oil prices may trade lower in the near-term, as Monday's action failed to respond to moderately favorable developments. There was support for yesterday's trade given by the bottom of a rising channel pattern at $86.20 and from a recovery in economic data from China and Germany. However, an uninspiring trade in the stock market and a lack of progress in fiscal cliff talks added on to other negatives such as growing U.S. oil production, building levels of gasoline stocks, weak oil demand, and a likelihood that OPEC leaves output unchanged tomorrow. Increasing numbers of quotes are likely from OPEC ministers today, and will make the results of tomorrow's meeting virtually known. We shifted our bias from negative to neutral on Friday in anticipation of a small recovery, but favor returning it to the negative side today. WTI could retest the Nov low at $84.05 while Brent could fall toward the Nov 5th low at $104.76.
WTI finished 37c/bbl lower yesterday while Brent gained 31c/bbl. Oil prices firmed throughout the overnight hours on the back of better data from China and Germany. Chinese industrial production and CPI data showed that the economy expanded without creating too much inflation. China's trade data revealed that the country's oil imports improved for the third straight month and reached the third highest level on record on a barrel per day basis (chart 1 below). The recovery in imports signaled that the economy continued to improve, as did a report that electrical output was +7.9% y/y. Electrical output correlates strongly with GDP, and also implies that the Chinese economy is recovering (chart 2). German export data improved and also suggested that the global economy recovered slightly. A third positive factor was Friday's COT data, which showed that non-commercials added 13,799 contracts while managed money traders added 13,981.
Support from these factors evaporated as the morning progressed, and WTI gradually fell into negative territory. WTI closed below the bottom of a rising channel pattern at $86.20 which suggests that further weakness will transpire. The stock market may have been a small drag, as the S&P 500 held between 0 and 2 points higher throughout most of the session. The focus may also be changing toward tomorrow's OPEC meeting and the likelihood that many participating oil ministers will make comments today. Saudi Arabia's al-Naimi suggested last week that prices were comfortable and the market well supplied. A change in production quotas is not expected and doesn't always mean much for prices anyway. The civil war in Libya two years ago didn't create a quota adjustment, as members with spare capacity such as Saudi Arabia just produced more. OPEC production has fallen about 1.0 mb/d in the last four months to 28.169 mb/d due to seasonal Q4 declines in demand. Production has fallen broadly across Saudi Arabia, Kuwait, Algeria, Angola, and Libya. Production could increase again early next year, so a maintaining of quotas will likely add pressure to the oil market.
January futures settled 9.1 cents lower in yesterday's trade, with front month futures contracts performing much worse than the back months. Weather was the dominant issue yesterday, as the market is trading in contango all the way through Jan '14 rather than the typical structure where the winter '13 contracts trade above the summer '13 months. Near-term weather prospects appear to be above-normal, as the 8-14 day forecasts over the weekend showed mostly above-normal conditions except on the east and west coasts. The Monday afternoon update brought back the below-normal area on the west coast that was a highlight of Friday's forecast (charts below). The weather related selloff pushed prices below key support from the 50-day and 200-day moving averages at $3.52 and $3.59, and beneath the low made last week at $3.507. The selloff stopped us out of a long recommendation entered Friday at $3.55 with a risk at $3.50.
It's difficult to get too bearish though, as prices may soon be low enough to see comparisons with coal once again. On a btu basis, coal prices are currently the gas-equivalent of around $3.17/mmbtu. Production shut-ins could become prevalent again, as oversupply is the dominant headline. The market may also be encouraged by last week's DOE report which made it likely that LNG export permits would be issued. Sempra Energy filed with the DOE yesterday to build an LNG export facility at its existing Cameron LNG terminal in Louisiana. The facility is planned to export 1.7 bcf/day by 2017. We think that prices could fall slightly further over the next day or two before stabilizing around Thursday's inventory number. Consensus is currently around +1 bcf and our estimate is -5 bcf. If there is indeed a draw, it could catch the market leaning too negative.
Global Economic & Dollar News
» Chinese Industrial Production was +10.1% y/y in Nov vs. +9.8% expected and +9.6% previously.
» Chinese CPI was +2.0% y/y in Nov vs. +2.1% expected and +1.7% previously.
» Chinese Trade Balance was +$19.63B in Nov vs. +$32.05B previously.
» German Exports were +0.3% m/m in Oct vs. -0.3% expected and -2.4% previously. Imports were also up, gaining +2.5% vs. +0.4% expected and -1.4% previously.
» Italy's Monti lost support and will step down after the parliament passes a budget. His predecessor Berlusconi announced he will run and roll back Mr. Monti's budget reforms (although Berlusconi is not favored to win). An election is likely in February. The move isn't a complete surprise, as Monti's holding of the post was supposed to be temporary all along.
» Greece Extended its Buyback by one day and is expected to receive €30.0B in total tenders.
» Pres Obama and Speaker Boehner met face-to-face on Sunday, although there wasn't much incremental progress to report.
» Chinese Oil Imports were +2.0% m/m and +3.0% y/y in Nov vs. +14.1% & +13.8% respectively previously. It was the third highest level on record on a barrel per day basis.
» Chinese Electric Output was 401.1 bln kWh in Nov and up 7.9% y/y.
» Sempra Energy filed for DOE approval to build an LNG export facility at its existing Cameron LNG terminal. Deliveries would be expected to begin in 2017. The new facility will be made up of three liquefaction trains with export capacity of 12 mln tons per year or 1.7 bcf/day.
Upcoming Energy Events
Tue - German ZEW Economic Sentiment
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)
Fri - Last Trade Jan Brent
Dec 19th - Last Trade Jan WTI
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.
Natural gas inventories could fall around 5 bcf this week, as temperatures were very warm compared to normal. This is the survey week that includes the 70+ degree readings in the Midwest on December 3rd, which is causing some models to forecast a build in stocks this week. The HDD reading rose to 120 during the survey week and compared to 160-165 previously, which causes our model to forecast a small draw of 5 bcf.
*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, 12/10/12
The overnight markets are rolling over as the morning is progressing as once again there is not much of any bullish influences in any market so far. The beans are down 2-4 cents, meal has lost $1, oil is down 5-10 points, corn is down 3-4 and wheat is down 5-6.
The weather in SA is still very good and improving in parts of Argentina that have been excessively wet. The forecast continues to point towards very good growing conditions throughout the entire region in Brazil and now appears that things are back on the rise for Argentine production in both beans and corn. With each passing day that weather is good is a day closer to record production out of SA, it's now moving into the middle part of the season and without any changes in forecast over the next few weeks the market could head into 2013 with an abundance of product.
The OI shows that the liquidation in corn is taking place as it fell by 12946 on Friday, wheat fell by 1556, beans were down 672, meal was up 807 and oil increased by 6671. The basis levels for both beans and corn remain stout with beans still trading in the area of +$1.20, corn inched higher late last week with the flat price break. The SA markets seem to show that there is still corn available and with a lack of beans available it appears that corn will continue to be exported. The weekend saw a return to the wheat demand as Saudi Arabia bought 295.0mt, Iraq bought 210.0mt and Egypt bought 115.0mt.
The outside markets are mixed with equities marginally lower, crude oil is up .75 on news that Chinese economic data is improving, natural gas is down .02, sugar is up .01, cotton is up .21, DCE is higher in beans, meal and oil but lower in palm oil and corn, the Matif markets are all lower and the MDEX finished higher.
The USDA will release its monthly S&D figures tomorrow which typically don't change all that much during the month of December, what is expected is to see a slight reduction in the bean CO figure as crush and exports will be increased while the corn CO figure is expected to increase marginally as exports continue to lag as well as domestic off take being less than anticipated.
The CME will list the short dated new crop options starting January 2nd 2013; these are fantastic tools to trade new crop without having to pay new crop prices.
The January options have 2 trading weeks left and with the USDA report tomorrow these could have some short term value for the outside chance that the USDA lays an egg tomorrow. As we have mentioned over the past few weeks the big inverses in future spreads are starting to crumble, especially in corn, it still seems to favor owning gamma over Vega as these spreads still have tremendous movement that will be coming in the next few months. The deferred BO options are starting to fall with BON puts trading down to 17%.