Energy Price Outlook
Oil markets may continue their sideways trend this week, as the trade continues to face pressure from a lack of progress on the fiscal cliff. Background pressure will remain in effect from growing domestic oil production, elevated oil inventories, and last week's hold at the 50-day moving averages in Brent and WTI. Opposing support received a boost last week from the hikes in 2013 demand estimates by both the EIA and IEA, growth in Chinese and European PMI data on Friday, and by weakness in the dollar sparked by improvement in the European debt crisis. We would continue trading oil markets as a trading affair in the near-term, as the market remains fairly priced.
The oil markets advanced throughout the overnight hours on the back of improvements in Chinese and Eurozone PMI data. The trend in Chinese PMI has been recovering nicely in recent months and should boost oil prices, as shown in the chart below. While the Chinese stock market advanced 4.3% on the news, the U.S. stock market wasn't as impressed and sold off on the day despite a solid improvement in industrial production. The Brent-WTI spread widened on BP's announced delay to its Whiting refinery upgrade.
The U.S. stock market remains worried about the lack of progress on the fiscal cliff, and the oil markets may return their focus to that issue if there isn't any progress over the weekend. Pres Obama and Speaker Boehner had what was described as a "frank" discussion on Thursday evening and Speaker Boehner said that the "lines of communication remain open." However, the WSJ reported that the distance between the two sides may be widening, and other political websites suggested that lawmakers may be returning to Washington after Christmas. The two previously mentioned deadlines of Dec 15th and 21st are both this week, and illustrate the lack of time remaining to hammer out the details and then draft and vote on a resolution. The issue may be made worse by House Minority Leader Pelosi's statement on Thursday that discussions about entitlements are off the table. Republicans failed to say whether or not they would allow tax rates to rise, and continue to just use the word "revenue." The situation is also made worse by growing sentiment that democrats are becoming increasingly happy with the republican "doomsday scenario" which would extend the middle class tax cuts but not deal with spending, dividend or capital gains taxes, or the debt ceiling. That will then put spending cuts off until the debt ceiling is reached in late-Feb.
On the bullish side, the market may focus on the progress made on the European debt situation on Thursday. Officials struck a deal on bank supervision that would create a rough framework for a single bank supervisor. The FT on Friday also awarded ECB's Mario Draghi as the person of the year for the work he has done in helping to repair the debt situation. In his July 26th "bumblebee" address, he suggested that the ECB would continue to do anything in its power to support European debt and prevent a breakup of the euro. On Sep 6th, he presented his plan for outright market transactions, which would be in place to buy European debt and prevent spikes in interest rates in troubled countries. This has forced the dollar index from a peak a couple days before July 26th of 84.05 to Friday's trade of 79.50. An improving European economy will be good for energy prices as will the weakness in the dollar.
January futures ended 3.3 cents lower on Friday, with above-normal weather remaining the focal point. There wasn't much news on Friday, and traders seemed to focus again on technical support at the 100-day MA at $3.25 on the continuation chart. Friday's trade moved down to $3.26 at the day's low, so it can't be said with certainty whether the $3.25 level has officially been tested. The market rebounded 5.3 cents off the day's low and closed in the middle of the day's trading range, but that doesn't qualify as a bullish reversal either. The100-day MA is backed up by support from the Sep 7th low at $3.20.
The early view on storage this week is a decline of 70-120 bcf. That would be less than the five-year average fall of 144 bcf and could keep some pressure on prices. At the same time though, NOAA's 8-14 day forecast brought in some below-normal temperatures in the U.S. southeast as well as in southern California. It's still a bit early to write off the winter heating season, so prices could eventually find a bottom. The $3.20-$3.25 range appears as the next best candidates to do so. We'd remain neutral on the market until bullish action signals the early stages of an upside reversal.
Global Economic & Dollar News
» Chinese HSBC Flash PMI was 50.9 vs. 50.8 expected and 50.5 previously. The Shanghai stock index surged 4.3% on the news.
» German Flash MFG PMI was 46.3 in December vs. 47.3 expected and 46.8 previously. Services increased however to 52.1 from 49.7.
» Eurozone Flash Composite PMI was 47.3 vs. 46.9 expected and 46.5 previously. Markit said that while the data is "consistent with euro area GDP falling for the third successive quarter, growth is looking like an increasing possibility in the first half of next year, barring any surprises."
» The FT named Mario Draghi as their person of the year, saying that his speech in July essentially dared the financial markets to challenge the ECB's will.
» Obama/Boehner had a "frank" discussion Thursday night about the fiscal cliff and the "lines of communication remain open." The WSJ reported that the distance between the two sides may be widening.
» U.S. CPI was -0.3% in Nov vs. -0.2% expected and vs. +0.1% previously. The y/y rate fell to +1.8% from +2.2%.
» Industrial Production was +1.1% in Nov vs. +0.3% expected and vs. -0.7% previously.
» BP's Whiting Refinery delayed the completion of its Pipestill 12 conversion until between June 1 and Aug 15th. Part of the reason for the delay could be degradation of fireproof coating on structural steel. The company denied that in a statement, but it filed a lawsuit against contractors on Dec 3rd for just such an issue. The project was scheduled to be completed sometime in early 2013.
» Encana delayed the first gas from its Deep Panuke natural gas project off Nova Scotia into the first half of 2013 instead of the end of this year.
» Iran and the IAEA made progress in talks on Thursday, and will reportedly have another meeting on Jan 16th.
» Crude Oil Rig Counts were -1 to 1,381 last week, while natural gas rigs were -1 to 416. Horizontal rigs were +2 to 1,105.
Upcoming Energy Events
Mon - Empire State Index
Tue - NAHB Housing Index
Tue - API Inventories (4:30pm EST)
Wed - Last Trade Jan WTI
Wed - Housing Starts
Wed - EIA Weekly Oil Inventories (10:30am EST)
Thu - Philadelphia Fed Index
Thu - Natural Gas Inventories (10:30am EST)
May 31st - OPEC Meeting
EIA Inventory Preview
We anticipate a decline of 1.0 MB in oil stocks this week. Oil stocks typically fall 13.54 MB between the w/e Nov 23rd and Dec 28th, as holders of oil typically try to liquidate more expensive oil purchases made later in the year and report the less expensive oil acquired earlier. That wasn't necessarily the case this year, however, as oil prices have generally declined throughout the year. At the same time, it's been difficult to determine whether oil holders are in fact liquidating, since stocks gained 0.8 MB last week, but fell 2.4 MB the week prior. Oil imports have been relatively firm in the last few weeks, and could make up the difference in terms of prompting only a small drawdown. Demand has been week and oil production high, and could also prevent declines as large as the 5.6 MB shown in the five-year average. A key comparison will likely be oil stocks with their five-year average. It reached 45.04 MB last week, which was the highest divergence in the series since Apr 24th 2009.
Oil products could increase again, as refiners have been processing increasing amounts of oil in order to reduce bloated stock levels. Utilization has increased more than 5.0% in the last five weeks, which has meant that an additional 900 kb/d of oil has been refined into products. Pressure on gasoline stocks will come from the divergence currently in place with API statistics, which show that the EIA has to fall or API has to rise 7.9 MB in order to converge again. We anticipate 2.0 MB being added to gasoline stocks and 1.0 MB added to distillates. Additional difficulty in predicting the products and utilization numbers this week will be the impact of BP's Whiting refinery problems. The facility shut its largest crude unit in November, however refinery inputs have increased since that time.
*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures