Energy Price Outlook
Oil prices rallied nicely in yesterday's trade but once again had trouble getting above the 50-day moving averages in WTI and Brent. Today's trade could witness a similar disposition, as the general reaction by risk markets yesterday to "bullish" news from the Fed was to finish either lower on the day (as equities did) or significantly below the day's highs (as energies and precious metals did). Yesterday's FOMC decision was positive for the oil markets based on the likely flight to hard assets that will result. The IEA report was also supportive because of its hike in the global demand estimate. However, weekly inventories showed a resumption in the building trend in oil stocks, and another increase to near 19 year highs in domestic oil production. The market's attention may also focus on the lack of progress on the fiscal cliff and the fast-approaching deadlines to complete a deal by year-end. These factors indicate that oil prices may come under pressure and thus have a tug-of-war with support given by the Fed. We would stick with the opinion that prices may fall in the near-term, but that's been a tiring recommendation in the last six weeks and thus there's no compelling trade to be had.
The oil market closed +$0.98/bbl in WTI and +$1.49/bbl in Brent. Oil prices rose overnight based on a hike in the IEA's global oil forecast by 110,000 b/d. Some support was also taken from the shutdown of a 325,000 b/d crude unit at Motiva's Port Arthur Texas refinery after a fire. The decision by OPEC to leave production quotas unchanged at 30.0 mb/d was generally expected and didn't offer much influence on the market. Oil inventory data from the EIA weighed on prices after a surprise build in oil stocks was reported. The comparison with the five-year average of crude oil, gasoline, and distillates increased to 23.21 MB collectively from 14.08 MB previously.
The FOMC decision was two sided for most markets. It initially offered support for energies based on the likelihood that investors would shift investments to hard assets such as commodities due to the resulting weakness in the dollar. The dollar fell after the Fed maintained its plans to purchase agency backed securities at a rate of $40B per month and converted Operation Twist into $45B per month of new long-term treasury debt purchases. The new net $85B in asset purchases could bring the Fed's balance sheet up from $2.86T last week to more than $3.80T by year-end 2013. The Fed also tied its asset purchases to the unemployment rate falling below 6.5%, which could be several years away. The changes in policy essentially represent QE4, which indicates both that the Fed anticipates the economy to remain sluggish and also that hard assets like commodities may remain attractive amid dollar weakness. Oil hasn't performed well on the "store-of-value" trade like gold has, so the end result may be that yesterday's Fed news could be negative.
January futures settled 3.0 cents lower yesterday, as the expectation for today's inventory number settled around a draw of 3 bcf. The EOXLive estimate is a draw of 5 bcf. The outlook for above-normal weather continued again yesterday, as NOAA's 8-14 day forecast showed the swath of above-normal temperatures across the central portion of the country move deeper into the red from Tuesday's update.
A lot of attention in local Chicago weather has been placed on the deficit of snow seen so far this year. Temperatures were in the low 30's earlier in the week, but the city beat a 1994 record of 280 days without a measurable snowfall. Temps may reach the upper 40's later this week, and there's a small chance of snow on Sunday. The next record in jeopardy is the latest snow of the year on Dec 16th set in 1965. The underlying point comes from a study done by WGN a week ago which suggested that the deeper the calendar goes into December, the stronger that history speaks for a sub-normal snow season ahead. If that's representative of other parts of the Midwest, the natural gas market may come to believe that there will be less heat radiated by snowcover this winter, and thus warmer temperatures.
For gas prices, we don't anticipate too much more weakness in the near-term. If today's inventory report shows the kind of decline we expect it to, it could create a bullish spark for the market. Traders may also soon focus on potential reports of coal-to-gas switching and production cutbacks for additional support. The next key support is offered at $3.36 from the Sep 19th low, and yesterday's trade moved within 0.6 cents of that level as support.
Global Economic & Dollar News
» Pres Obama appears to think that a deal on the fiscal cliff is close at hand, although republicans don't appear to share that sentiment in their comments. He spoke with Speaker Boehner again on Tuesday evening for 15 minutes, but the call was described as "tense" by some who know the details.
» The White House has lowered its demand for new tax increases to $1.4T from $1.6T initially proposed (and vs. $800B discussed in Aug '11).
» Pres Obama has started reaching out to Congressional Democrats over spending cut specifics, according to the WSJ.
» Chairman of the House Ways & Means told staff that a deal may not occur by Christmas and to be prepared to return between Christmas and New Year's.
» The FOMC left rates unchanged as was expected. It said that it will follow Operation Twist with $45B in new purchases of long-term treasuries at the beginning of 2013, which was also expected. A new development came from the Fed's tying of low rates and QE to a target unemployment rate of 6.5% as long as inflation doesn't get above 2.5%. The new measure essentially becomes QE4.
» The FOMC revised its 2013 GDP forecast to 2.65% from 2.75% made in Sep. 2014 was cut to 3.25% from 3.40%. The Fed's unemployment rate forecast was cut to 7.55% from 7.75% previously for 2012, while 2013 was cut slightly to 7.05% from 7.10%. Its forecast in 2015 was the first to go below its new 6.5% unemployment target and was cut to 6.30% from 6.40% previously.
» OPEC agreed to keep its quota unchanged at 30 mb/d. Saudi Minister al-Naimi said there was no disagreement on the rollover of the quota and that his country will respond to customer demands. He added that he's not concerned about the growth in shale production in the U.S.
» The IEA raised its 2013 global oil demand forecast by 110,000 b/d over its November forecast. One of the factors cited was signs of a rebound in Chinese demand.
» Motiva shut its new 325,000 b/d crude unit at its Port Arthur Texas plant yesterday following a fire caused by a pipe fracture. The unit had been running at about 240,000 b/d after it had resumed operation earlier this month. Repairs are expected to take a few days.
Upcoming Energy Events
Thu - Natural Gas Inventories (10:30am EST)
Thu Evening - Chinese Flash HSBC MFG PMI
Fri - Last Trade Jan Brent
Tue - API Inventories (4:30pm EST)
Wed - Last Trade Jan WTI
Wed - EIA Weekly Oil Inventories (10:30am EST)
May 31st - OPEC Meeting
EIA Inventory Review
The EIA reported inventory numbers yesterday that were in-line with the direction of the API data shown on Tuesday afternoon, but counter to the trend that developed in the prior week. Oil stocks gained 0.8 MB as refineries cut back slightly on production, and as imports increased yet again counter-seasonally. There were indications a few weeks ago that the typical year-end tax related liquidation of inventories would not take place this year because prices had generally fallen throughout the year, and made LIFO accounting issues less detrimental. That was countered by last week's 2.4 MB decline in oil stocks but supported by yesterday's 0.8 MB increase. While that makes predicting these numbers more difficult and somewhat confusing, the bottom line of yesterday's report was more clear. Stocks of oil and products are a collective 23.21 MB above their five-year averages now compared to 14.08 MB above it the previous week. That should reinforce the downward reaction that energy markets had to these numbers yesterday and imply that there could be further weakness to come. 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 inventories were +0.8 MB vs. -2.1 MB expected. The increase raised stocks to 45.04 MB above the five-year average compared to 41.04 MB above it last week, and marked the highest divergence in the series since April 24th 2009 when it reached 50.92 MB. It surpassed the 42 MB and 44 MB divergences that were the highest seen earlier this year (chart 1). Imports were the largest driver for the increase and gained 269 kb/d. Oil production rose 35 kb/d to 6.852 mb/d and is now at the highest level since Jan 28th '1994, or nearly 19 years ago. Refinery inputs fell 23 kb/d on the week, and also added slightly to inventories. Demand increased 488 kb/d and was subtractive, however, the overall trend in demand is still fairly weak. Overall, the oil inventory number was negative due mostly to the comparison with the five-year average.
Gasoline stocks were +5.0 MB vs. +2.0 MB expected. The increase put gasoline stocks at 5.97 MB above their five-year average and compares to 3.14 MB above it last week. Imports increased 72 kb/d and was the only factor to explain the increase. Production fell 289 kb/d and demand increased 134 kb/d and took away from inventories. The gain was likely caused in part by the declines in demand in preceding weeks that finally caught up to the market, and by the recent gains in utilization made in recent weeks. With inventories having gone from 4.24 mb/d below the five-year average to 5.97 mb/d above it in just the last four weeks, we interpret this number as bearish for the market. Prices did fall in the minutes that followed, but advanced overall on the day due to the shutdown of a crude unit at Motiva's Port Arthur refinery.
Distillate stocks were +3.0 MB vs. +1.7 MB expected. The level of stocks improved compared to the five-year average and is now 27.80 MB below compared to 30.10 MB below last week. The increase was helped by gains in refinery utilization in the past few weeks even though it fell 0.2% yesterday. Distillate production by refineries also fell 85 kb/d on the week, but had shown solid increases in prior weeks. The four-week average of demand fell 152 kb/d on the week, and may fall sharply next week as a surge in mid-Nov drops out. The trend toward building distillate stocks suggests that this number may offer pressure on the market in the near-term. Yesterday's trade was pressured by the numbers but advanced regardless, due to the outage of a crude unit at Motiva's Port Arthur refinery.
Published Wednesday morning, 12/12/12
The overnight markets continue down the path of least resistance as yesterday's USDA figures proved to show that there is nothing that has changed and within a few short months the perception of SA bountiful supply will solve all the world's problems. The beans are down 7-8 as of 8CST, meal has lost $2-3, oil is down 10 points, corn is down just a small fraction and wheat is virtually unchanged.
The figures show that supplies are still tight for the time being with beans only having 130 CO and corn still at the critical level of 647 but it is perceived that these will be the lowest levels of the season and only increase if any changes are to be made. The wheat stocks are on the rise not only in the US but globally and we continue to see additional feed stuffs available from all corners of the globe and with that the 647 CO figure on corn doesn't seem so dire. The corn/wheat spread has also collapsed to levels that have not been seen in years and with this there is already discussion of how much more wheat can be put into the feed sector, not only in the US but globally.
The bean balance sheet has some interesting structures to it since US crush margins are moving to the highest levels in nearly a year with nearby board margins pushing just shy of 70 cents. The export markets remain robust which will create a good battle between domestic crushers and exporters for the next few months until SA is on line.
The SA weather will be the driver for the coming weeks but with each passing day that there is not a problem it is a day closer to record production figures, it's likely that come next Monday if the forecast doesn't show any concern for crop damage the entire grain market could be heading to lows that has not been seen in for quite some time.
The outside markets are mixed with equities marginally higher, crude oil is up .02, natural gas is down .02, sugar is down .12, gold is up $9, $index is lower, cotton is down .07, RBOB is up 289, DCE is lower in all markets, Matif is lower in rapeseed and corn but higher in wheat and MDEX is lower.
The OI spiked up in beans yesterday increasing by 13918, meal was up 2072, oil increased by 8524, corn fell by 3661 and wheat was down 1528.
The soy options once again fell back into the teens yesterday which at this point seem like value again for those who want to play the market from a directional play. The SG straddle that gets through the critical January 11th report is trading 78 cents; it's likely the market will move more than 78 cents before the report let alone after. The corn is still plagued with breaking and doing export business that the US can't do while a rally will cap the little export business that is being done, saying this corn flat price now looks expensive vs. wheat which could favor buying multiple of CG puts vs. selling 1 WH straddle. The products are trading at higher volatility levels than beans and with board crush so high owning bean calls rather than product calls could be something to look at.