Energy Price Outlook
The market appears as though it will trade to the downside in the near-term thanks to Monday's break of key channel support and due to the inability to maintain rallies. Pressure may also come from a lack of progress in fiscal cliff talks, the potential that OPEC leaves production unchanged at today's meeting, building levels of U.S. gasoline stocks, and high levels of U.S. oil production. While negative factors still appear compelling, the market is once again beginning to show a reluctance to break below the November low in WTI at $84.05. Bullish traders may also be bolstered by yesterday's cut in the EIA's 2013 estimated supply/demand surplus of 130 kb/d to a deficit of 50 kb/d. On balance, we would look for WTI to retest the Nov low at $84.05 while Brent could fall toward the Nov 5th low at $104.76.
WTI settled +$0.23/bbl yesterday while Brent finished +$0.68/bbl. Oil prices fell throughout most of the session, as the optimism that was witnessed early regarding the fiscal cliff had faded. House Speaker Boehner made a speech on the house floor yesterday suggesting that the president needs to get specific on spending cuts. Nancy Pelosi responded to Mr. Boehner by saying that the cuts were already made in spending bills that have already passed. Senate Leader Reid said later in the session that a deal may not be reached by Christmas. Some political wonks are looking at the Dec 15/21 dates mentioned last week as soft & hard deadlines for a deal and subtracting the 2-3 days it would take to write and vote on a bill. Such analysis will put added pressure on both sides and could create a bearish environment for energy prices.
Pressure may also come from today's meeting of OPEC oil ministers. The latest news from yesterday was that the cartel had not arrived at a consensus on whether quotas need to change. That came after oil ministers from Angola, Ecuador, UAE, and Iran all suggested that prices were okay and that the market was balanced. Bloomberg data shows that OPEC's production has already fallen about 1.0 mb/d in the last four months to 28.169 mb/d due to broad-based declines by various countries. The decline in output may be tied to seasonal weakness in oil demand in OECD countries and may not be a reflection that ministers believe prices are too low. Output should increase again at the start of the New Year. We think that if the production target remains unchanged today, it may become a negative for the oil market.
Finally, the EIA published its Short-term Outlook yesterday and could offer support after it raised its 2013 global demand estimate by 60 kb/d. It also expects 120 kb/d in less production than it did a month ago due mostly to cutbacks in OPEC output. The supply/demand balance thus went from a surplus of 130 kb/d to a deficit of 50 kb/d. In addition to support from the hike in demand and cut in the supply/demand surplus, the EIA slightly raised its 2013 price target to $88.38 from $88.29 predicted in the November report.
Gas prices finished 4.8 cents lower yesterday in what was moderate follow-through from the three-day selloff. Weather was a focus again, as was the EIA's monthly short-term outlook report. The EIA raised its forecast for 2013 natural gas demand by 0.13 bcf/day compared to last month's report. Demand is expected to total 69.41 bcf/day now compared to 69.28 bcf/day expected previously. Prices are forecast to average $3.68 in 2013 vs. $3.49 projected last month. The bullish news from the increase in demand and prices was countered by the bearish news of a greater hike in 2013 supplies of 0.45 bcf/day. The forecasted supply/demand surplus will thus increase to 1.12 bcf/day from 0.80 bcf/day as a result (chart 1 below). Demand growth has slowed in the EIA's monthly forecasts throughout the year. The second chart shows that 2013 demand is now forecast to decline 0.4% y/y and compares to a forecasted increase of 2.6% as recently as the June report.
Weather played a role again in yesterday's selloff too, and sentiment is growing that the winter will not be cold enough to alleviate high levels of inventory. This week's inventory data will mark the fifth week since the first withdrawal of the season. A withdrawal of 125 bcf has been seen in the first four weeks, and given that consensus estimates are currently near unchanged on the week, it could remain that way through the first five weeks as well. A five-week decline of 125 bcf would compare to a 10-year average of 327.9 bcf and would be the second lowest reading in the last 10 years. The withdrawal season has averaged 18.3 weeks long, and suggests that 27% of it is already behind us. A simple interpolation would allow us to multiply the 125 bcf withdrawal by the inverse of 27% to suggest that a little less than 500 bcf will be withdrawn all winter. Obviously that is going to be too low, but nonetheless is what traders fear at the moment. While these points are bearish for prices, the data do not show that inventories remain high in years of light early-season withdrawals. The smallest withdrawal of the last 10 years was 2006's 44 bcf and that year went on to see 1,950 bcf taken out during a longer-than-normal 21 week season. We present the data from the last 10 years in the table below.
Prices may continue to fall in today's trade, but we think that a bottom may come sometime around Thursday's inventory number. The early consensus is for a build of 1 bcf and we think it could fall around 5 bcf. There may also be growing discussions regarding production shut-ins and increased coal-to-gas switching to support the market. The next key support is offered at $3.36.
Global Economic & Dollar News
» German ZEW Economic Sentiment was 5.7 in Dec vs. 6.0 expected and 5.4 previously.
» Global Job Prospects are set to weaken in Q1 '13 particularly across Europe, according to a Manpower survey. Economic uncertainty will hinder companies' spending and employment plans, according to the report.
» Fiscal Cliff Negotiations appear to be making progress, according to an article in the WSJ. The change has come since Obama and Boehner have been negotiating one on one since Sunday.
» Democrats are urging a delay on the upcoming medical device tax of 2.3%. The White House is opposed to any postponement.
» JOLTS Job Openings increased to 3.675M in Oct from 3.547M previously.
» Speaker Boehner spike midday yesterday and said that he's waiting for Pres Obama to get specific on spending cuts. He said that "the longer that the White House slow walks this process, the closer the economy gets to the fiscal cliff."
» Bank of America said that there's a risk that WTI could drop to $50/bbl in two years, but it's not their central premise. Said that WTI will still average $90/bbl in 2013, while Brent averages $110/bbl in 2013.
» Angola said that it doesn't see trouble brewing for OPEC next year and that it may take the same decision as a year ago on quotas.
» Ecuador's Oil Minister said that OPEC would likely agree on leaving output unchanged.
» UAE's Al-Hamli said that the oil market is well balanced and demand is there. He added that as long as there is demand, there's no need to do anything.
» Iran said that the oil price is okay and not too high.
Upcoming Energy Events
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
Tue - API Inventories (4:30pm EST)
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%.