Energy Price Outlook
Oil prices created an inside day in West Texas Intermediate crude Thursday, and both Brent crude and WTI again had trouble with their respective 50-day moving averages. Those technicals may offer pressure again in Friday's trade, during which the market will also be weighed down by continued growth in U.S. oil production, growth in oil stocks, building gasoline inventories and generally weak demand.
The ongoing lack of progress on the fiscal-cliff deal will also pressure energy prices. The Fed action on Wednesday was positive from a "store-of-value" perspective as investors may gravitate toward hard commodities -- but quantitative easing hasn't benefited the oil market as much in recent years as it has for gold. The Fed's 6.5% unemployment threshold may also create uncertainty as that rate gradually declines. The Port Arthur refinery of Motiva, a joint venture between Shell (RDS.A) and Saudi Aramco, is expected to restart its crude unit over the weekend. 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, so there's no compelling trade to be had.
WTI had an inside day Thursday and settled $0.88 lower per barrel. Brent finished $1.59 on the downside. Thursday's selloff in Brent undid the previous session's progress, after which it was outperforming WTI. Weakness here was triggered by a lack of progress in fiscal-cliff negotiations. Statements from House Speaker John Boehner caused risk reduction when he said the White House "is so unserious about cutting spending that it appears willing to slow-walk our economy right up to and over the fiscal cliff." He added that the "risk remains" that all tax rates will rise at year's end.
House Minority Leader Nancy Pelosi contributed to the anxiety when she said that any talk of deeper spending cuts should await discussions on a tax overhaul next year. The stock market sold off steadily throughout the session on the news, and is beginning to focus more on a potential Republican "doomsday scenario" in which they pass an extension of the middle class tax cuts and nothing else on unemployment-benefit extensions, taxes on dividends and capital gains, the debt ceiling, closing loopholes and so on.
The inability of Washington to come to an agreement is now showing itself once again, just as it did during the debt-ceiling negotiations in July and August of 2011. It could continue to put pressure on the market in the near term.
Natural gas fell $0.035 per MMBtu Thursday as trade approached the weekly inventory numbers. Once again, weakness came as most forecasts called for above-normal temperatures in the central portion of the U.S. The inventory report was a bit bearish, too, as it showed a build of 2 billion cubic feet of nat gas, as compared with the consensus of a 3 BCF draw. Prices declined around $0.05 on the news but, within a few minutes, they rebounded toward an unchanged level on the day. Inventories are now at 283 BCF, above the five-year average, and up from 168 BCF last week. They're also now at 48 BCF above the top of the five-year range, which is the highest since Nov. 9, when inventories were still contracting toward the five-year average.
Since the first withdrawal five weeks ago, inventories have only sunk to a current level of 123 BCF. In our comment Wednesday, we looked at seasons with small withdrawals in the first five weeks to see if they were precursors to smaller drawdowns over the entire season. The answer is that they are not. There was only one other year in the last 10 that had a smaller withdrawal to this point -- minus 44 BCF in 2006. That entire season withdrew 1,950 BCF and was only slightly below the average decline of 2,043 BCF. The smallest full-season drawdown was 1,483 BCF in 2011, and the first five weeks started with 304 BCF in withdrawals.
Traders appear to still be leaning bearish, based on the small amount of withdrawals so far, but history suggests that may not be appropriate. Production has increased substantially due to shale and may still offer pressure, but small withdrawals early in the season are no guarantee that the entire season won't see improvements in demand. Focus now appears to be turning toward support at the 100-day moving average at $3.25 on the continuation chart for the next possible chance at an upside reversal. We'd remain neutral on the market until bullish action signals the early stages of an upside reversal.
Global Economic and Dollar News
● China's Xinhua News said that the country won't have large-scale economic stimulus plans in store for next year.
● European officials struck a deal on bank supervision that would create a rough framework for a single bank supervisor. The European Central Bank will have some control over banks with assets of greater than 30 billion euros.
● In the fiscal-cliff negotiations, Republicans and Democrats appear to be closing the gap between their stances on taxes, but little additional progress was reported. House Speaker Boehner offered to accept more tax revenue than the $800 billion previously discussed, but only if serious entitlement reforms are considered.
● U.S. retail sales came in at a climb of 0.3% in November vs. the expected 0.5% uptick and October's 0.3% decline. Excluding autos, sales were unchanged, in line with expectations.
● Initial jobless claims totaled 343,000 vs. expectations for 369,000, and down from the prior week's 372,000. Continuing claims were 3.198 million vs. the prior 3.221 million previously (revised up from 3.205,000).
● BP's (BP) Whiting Refinery shuttered Pipestill 11C, one of its two operating crude units, for unplanned repairs. The unit unsuccessfully attempted a restart last weekend. It mainly processes sour crude at a rate of around 100,000 barrels per day.
● Natural-gas inventories rose by 2 BCF vs. an expected decline of 3 BCF. Inventories are at 283 BCF above the five-year average, or 8.03% higher, vs. 168 BCF above, or 4.62%, last week.
● Tesoro (TSO) is looking into rail for potential shipping of Bakken and Canadian crude oils to its refinery in San Francisco. An unloading station has already been modified to receive 5,000 b/d of Bakken by rail, and the plant has the capacity to process between 30,000 and 50,000 b/d.
Upcoming Energy Events
● Friday -- Last trading day for January Brent crude
● Tuesday, Dec. 18 -- American Petroleum Institute inventories (4:30 p.m. EST)
● Wednesday, Dec. 19 -- Last trading day for January WTI; weekly oil inventories from the Energy Information Administration (10:30 a.m.)
● Thursday, Dec. 20 -- Natural-gas inventories (10:30 a.m.)
● May 31 -- Organization of the Petroleum Exporting Countries (OPEC) meeting